Deficit Reduction Equals Painful Necessity

Posted on Monday, 1st August 2011 @ 04:15 AM by Text Size A | A | A

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It’s baffling to hear certain politicians constantly harp on the need for drastic cuts to government now, as if that will be the instant elixir that cures all of the ails of our economy.  Don’t misunderstand me.  Reducing the deficit is necessary for our future prosperity, but don’t mislead the public about its true consequences.  When Senate Minority Leader Mitch McConnell says that raising taxes is a “job killer”, doesn’t he realize that cutting government spending will also “kill” jobs?

In fact, cutting government spending will impose more immediate pain than tax increases.  Why, do you ask?  First, every dollar of government spending goes directly into the economy.  That means money directly into the hands of a small business owner contracting with the federal government, wages for a construction worker, and a salary for a public school teacher.

On the other hand, increasing taxes does not have the same effect.  This is because individuals do not “spend” every dollar they earn into the economy.  A portion of that goes into saving.  While saving does help our economy in the long run as financial institutions use those deposits to eventually lend to businesses and households, its full impact is not realized until months or even years later.

Let’s look at the recent labor numbers and ask yourself whether the downsizing of government impacted employment.  (Note:  These numbers would be worse, if not for temporary U.S. Census workers):

  • June 2011:  39,000 jobs lost
  • May 2011:  48,000 jobs lost
  • April 2011:  24,000 jobs lost
  • March 2011:  25,000 jobs lost
  • February 2011:  22,000 jobs lost
  • January 2011:  26,000 jobs lost

House Leader John Boehner, House Majority Leader Eric Cantor, and presidential hopeful Michelle Bachmann, stop being disingenuous!  Stop misleading the public about these nagging truths.  Any serious deficit reduction involving government spending cuts alone will severely impact one or more of the following:

  • Safety net for vulnerable Americans:  Are you aware that social public spending as a percentage of gross domestic product is the lowest among the Group of Seven countries (excluding Russia)?
  • National security: Is it sensible to draw down our military forces when there are various terrorist groups whose evil intentions involve destroying the American way of life?
  • Transportation:  As roads deteriorate, don’t we realize that leads to less business activity?
  • Education:  With tuition costs rising, do we want to cut financial aid and grants at a time when low income and middle class families are feeling the pinch?

Definitely, raising taxes on the wealthy will adversely affect profitability and jobs in the short run.  Markets will contract as concerns rises over declining disposable incomes mean less money for investing.

Then there’s the prospect of higher marginal tax rates, which create a disincentive toward work and investment.  That leads to  investors being less likely to use venture capital in funding high-paying, emerging technologies.  Many wealthy individuals are small business owners, so the primary engine of job growth will be compromised.

Given the nasty consequences of either option, why choose either?  Well, that is essentially what Congress has been doing for the last couple of decades and that has led us to our current predicament.  Eventually, the financial markets will punish our inaction and drive up interest rates that will hamper our future living standards.

One might ask how interest rates have remained low now with deficits at such high rates.  Economic theory states that high deficit spending causes interest rates to rise due to the crowding out effect.  How can that be?

The answer lies with the Federal Reserve and their money supply management.  While they must be given credit for averting an economic calamity in 2008, their actions over the past decade are responsible for our current plight.

Presently, the Fed continues to make matters worse with two unsuccessful programs of quantitative easing, which have caused global turmoil due to a glut of dollars that are redirected into developing economies.

For example, China is scrambling to deal with rising capital inflows that is threatening their nation with high inflation.  If their economy collapses, then it will be harmful to the U.S. because their vast source of cheap goods will decline and place upward pressure on prices in the U.S.

Certainly, slashing government spending and raising taxes will be costly to Americans.  However if the goal is achieving broad based economic prosperity, then we must resort to a combination of both.

Say no to special interests getting their way, and say yes to shared sacrifice that will eventually lead us to a more sustainable economic recovery.

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