TW: I have avoided getting too technical on the economic stuff but when I run across a good concise piece I want to share it. Certain Republican ideologues continue to pound the drum for tax cuts in place of spending stimulus and they fret that our budget deficits will explode. They are wrong. Not about the deficit as it will explode, it already has (and I am not talking about the hundreds of billions sent to Iraq). But we need demand stimulus, tax cuts will not do the job and the deficit in this case must be damned (and remember insisting upon balancing the budget in the early 1930's was the path Herbert Hoover took).
Our economy is suffering from contracting (and if you examine the charts collapsing is the more apt term) demand because the rational move at the individual or firm level is to hoard one's nuts in order to get through the economic winter that has descended upon our nation. Concurrently our credit markets are contracting or de-leveraging. A dollar of savings used to support say ten dollars of credit or unfortunately even thirty dollars. Those days are over for the foreseeable future.
Tax cuts especially any cuts oriented to more wealthy individuals (e.g. dividend taxes even AMT relief) would largely be saved. Savings are normally a great thing of which Americans tend to do far too little. Now things are cockeyed and savings merely exacerbate the demand collapse. If our nation savings rate had been higher over the past thirty years, we would likely not be in this predicament. But it has not and now the only remaining entity that can force spending is the government. Government spending has some insidious characteristics including it is hard to stop once it starts, it can be inefficient, and it can be subject to corruption amongst other issues. It is not a perfect option, merely just about the only remaining viable option.
From Galbraith at National Journal:
"...Our present problem is not that it[the budget deficit] is too big, but that it is too small. Far too small.In principle, economic growth can come from household consumption, business investment, government spending, or exports. This is a tautology, indisputable and known to everyone who has ever opened a textbook.
Household consumption depends on incomes and on credit...Business investment depends on the expectation of profit. But with consumption falling, there can be no expectation of profitability for the time being. So business investment will follow consumption down....
For these reasons, the entire private sector, across the entire country and indeed the world, is pulling the economy downward at the present time...
In these conditions, only government spending can pull the economy out of the ditch. Government must spend. It must do so by as much as necessary in order to maintain a high level of employment. Aid to states and localities, an infrastructure fund, increased social security benefits, foreclosure relief, loans or grants to industry, a green jobs program -- all can be useful in coping with the crisis. ..
There is no harm in seeking out wasteful or unnecessary programs to cut as the President-elect proposes. The war in Iraq is a huge waste of money with minor benefits to employment. Missile defense is a vast waste of construction, engineering and scientific resources with no benefit to security. Bridges to nowhere and roads to the wilderness add nothing to the value of the national capital stock. But the point of cutting waste and boondoggles is not to reduce the deficit, but to release real resources for better uses. The obligation to use those resources, and to deploy the public funds necessary to ensure that they are used, remains..."
http://economy.nationaljournal.com/2008/12/is-the-deficit-a-threat-to-a-f.php#1184661
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