Welcome back, class! I know that it’s been a while since our last lesson but things have been pretty busy here in Bobville. When we last left off we had to take a step back to explain wealth creation for some of you who still were having trouble understanding why you do not create jobs. Now we can start moving forward again, and this chapter will be the calm before the storm. Today’s lesson will actually be the lightest in terms of content, but you’re going to need it. The next two lessons on unfunded liabilities and unintended consequences are going to be the most difficult ones for you to grasp, much less accept.
Wikipedia defines investment as “investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production.” In other words, investment is something willingly purchased at the present time in hopes of gaining a return on that investment. Over time, whether or not is is a good or bad investment will be based on growth or failure to grow. This is why government spending can not be called investment in the strictest sense of the word. Society can benefit by items purchased by the government, such as:
- Education (improving the quality of our workforce, while how those dollars are allocated will be an endless debate)
- Waging a war on foreign soil (sending trained professionals to kill those who would harm American citizens)
- Foreign aid (bribing foreign governments to improve opportunities for Americans abroad)
- Highways (creating a commerce and transportation infrastructure).
- The important distinction is that while the items just listed produce benefits to society, but by their nature they do not allow for the same measurement as conventional investments.
- Also under the government spending umbrella are items that are simply produced while yielding no value but simply waste money. The president’s czars and regulation designed to increase mercury levels in landfills fall in this category.
- The easy pinatas in the room are government ventures that have lost money for the taxpayers hand over fist. Amtrak, Solyndra, the GM bailout and Fannie and Freddie Mac fall into this category. There’s no need to beat you up with the details of these, but if you’re going to call your spending investment please give the American people a clear picture of how these investments have performed, and in turn how you as an investment manager have performed over the years.
If you’ve understood the previous lessons on job creation and wealth creation this concept should be pretty easy for you. Since there is nothing more to teach here I thought I’d add a fun exercise to wrap this up. Presidents like to brag about how much they’ve “invested” in our country, so what is each President’s return on investment? We use this measurement for all real, tangible investments, so why not here? Here are the exercise’s assumptions:
- Return on investment is simply a measure defined as (Total Receipts -Total Spent) / Total Receipts. This is not a real measure given that we just covered how government spending is not true investment, but is more of a measure of how wisely our leaders are spending our money relative to what they collect.
- Raw data is from the White House’s web site, and the original spreadsheet can be found here.
- Early presidents are lumped in together – we don’t start to get good individual presidential data until the start of the last century.
- Each president’s measured years lags one year behind his entrance into office, since each new president operates under the budget of his predecessor.
- Total dollars gained or lost are not our primary driver for success or failure – percentages are used instead. The most popular measurement for return on investment performance is by percentage, so that is what is being used here. Here is how the presidents fared in chronological order.
Click here for a larger version
What does all of this tell us? Not too much, to be perfectly honest. By the measure used a president who decides to have the government confiscate every last piece of private wealth while less rapidly increasing government spending would look like Peter Lynch. At least they would look good for a year until reality sets in, of course.
- It was interesting that the only president in modern history to show a net “gain” during his tenure was Clinton. He finished fifth best with a 0.5% net gain. Yes, I know that Congress actually passes the budgets and that the gridlock that Gingrich created helped to control spending, but let’s give some credit where it’s due. The president is the highest ranking official in his party and has some sway over how his party’s members in Congress behave.
- The bottom surprised me more. I wasn’t all that surprised that Reagan and Bush 41 finished at 5th and 6th worst. Yes, I’m aware of the Democrat-controlled congresses as well, but let’s give some blame where it’s due as well.
- And even bigger surprise was Dubya – 7th worst, while I was expecting a worse rating. Although he and Tom Delay decided to go on a spending binge, the fact that skyrocketing receipts collected during his presidency prevented him from finishing lower on this list. Maybe there is something to be said for not continuously demonising and threatening the very businesses that generate your tax revenue after all.
- One that will surprise many but was no shock to me – Hoover. Many Americans still subscribe to the notion that Hoover took no action against an economic downturn and only when FDR came into office did his New Deal programs save us. Yes, Hoover saw tax revenue drop as a result of the recession, but like his successor he chose to spike government spending, and with similar results.
- The fact that our worst investment manager was FDR shouldn’t surprise anyone, especially his supporters. Having paid attention to your previous lessons, I know it didn’t surprise you.
- And of course, the only way to conclude this is by looking at President Obama. For this exercise we’re only looking at his 2010 actuals and 2011 projections. It will be interesting to see how he ranks after his four years, but as it stands right now the president is selling himself short. While he thinks he is only our 4th greatest president, in terms of bankrupting our nation he stands solidly at #3!
Up next is Lesson 8 – “Do you know what an unfunded liability is? It’s why you belong in jail!”
Previous Lessons:
Lesson One: It’s Not Your Money
Lesson Two: Intro to Microeconomics, or Why Prices Matter
Lesson Three: Intro to Macroeconomics. or So that’s Where Government Fits In!
Lesson Four: You Don’t Create Jobs – It’s Time to Get Over FDR!
Lesson Four A: By Definition the Government Can Not Create Wealth
Lesson Five: Businesses are Greedy – That’s Not Necessarily a Bad Thing!
Lesson Six: You are Greedy – That is a Bad Thing!
Nice to see Harding get some indirect recognition. He gets tarred in the history books because he did turn a blind eye to corruption and crony capitalism in his administration – but his economic policies were first rate.
Yep, my grammar school was named after gool ol’ Warren G!