Thursday, September 15, 2011

Who's Afraid of the Big Bad Spending Cuts?

Front and center to the debate regarding whether or not government spending should be cut is the notion that doing so at this time would be dangerous for the economy.  Once again, failure to look at both sides of the equation leads to an erroneous conclusion.

If cutting government spending meant that overall spending was reduced that might be a problem, but money doesn't just disappear.  If the government doesn't take as much money--either by taxes or borrowing--more money/purchasing power stays in people's pockets!  People who will spend it (and maybe even save a little)!

The difference is that people making their own choices where to spend their money do a much better job of it than the government.  Think of the legendary $500 hammers bought by the Defense Department.  Or the Big Dig in Boston that was supposed to cost $2.6 billion and ended up costing almost $15 billion!

Of course, right now pundits like Paul Krugman are saying that the problem is people aren't spending enough so the government has to pick up the slack.  Can you see why that argument makes no sense?  First, any money the government spends has to be taken from consumers--either via taxes or inflation (anyone notice prices rising the last couple of years?)--eliminating an equal amount of purchasing power.  Second, government employees actually do the spending, and history has shown that they're really not that good at their jobs.  Once again, just think of the hammers.

If, on the other hand, we assume that individuals are only 5% more efficient at spending their money than the government, then even if individuals save 5% of any money the government doesn't spend--and spend the rest--the effect on the economy would be the same.  [I used 5% because that is estimated to be the current savings rate in the United States.]  If they are more than 5% more efficient (i.e., they can buy hammers for less than $475) then the economy is net-net better off, disregarding the increase in savings!!  Since I'm pretty sure that individuals are better at buying hammers--or just about anything else--than the government, what's so scary?

Further, since individuals making rational purchase decisions can buy a lot more goods and services--goods and services that are produced and provided by people employed to do so--for the same amount of money as a government that spends too much on everything it buys, you can see why taking spending out off government's hands would actually increase employment!  And why increased government spending has had the opposite effect!

So, instead of Americans spending (or saving) their money as they would like, the government takes it and spends it on the wages of government employees and overpriced goods and services.  Is it any surprise this strategy hasn't worked for President Obama the first five times he's tried it?  Or that government workers and unions say that spending cuts would be harmful?  To them maybe, but not to anyone else.

8 comments:

  1. CarolynPrescott@web.deSeptember 19, 2011 at 1:39 AM

    Oh, those hammers! They've been used a thousand times to justify absurd positions. No one would argue that the price was right, but there are millions of examples of government spending that are effective. Let's take a few: the research that led to development of the Internet, the funding of FEMA to address the plight of victims of Hurricane Irene, the funding of the highway system that has so beneftted businesses across the country. There are great things we can do collectively that we cannot do individually and that the private sector doesn't want to do because certain things don't promise immediate profits, or high enough profits. Government spending is also an important part of the economy, and the notion that government workers are overpaid is erroneous; there may be isolated cases, but especially educated workers in the public sector get less than their private sector counterparts. They often go into government service because of the value they place on, you guessed it, service. Quit bashing and start thinking.

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  2. CarolynPrescott@web.deSeptember 19, 2011 at 1:48 AM

    I have to add: most of what you are saying is unsupported by the facts. Tax decreases have historically NOT been a factor in stimulating the economy, while government spending in a recession has been generally very effective in priming the pump. Also, we as a country have had periods of high debt and high spending, most notably after WWII, when funding for the GI bill, VA housing, National Defense Student Loans, basic scientific research, NASA, highway building, and government spending in many other areas was a major factor in growing the middle class. And while we're looking at all those successful programs, let me ask you this: did you or anyone in your family ever benefit from those programs, directly or indirectly? Look into your past and think it through.

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  3. A number of responses:

    1. Public sector employees get pensions which they always seem to overlook whey they are moaning about their pay. They are not underpaid--especially for what they do.

    2. If my family benefited from the government taking property from another person (e.g., Indian land) am I wrong to criticize it?

    3. Historically government may have primed a pump that was running slowly (or dead, as in the Depression). They've never done it by raising taxes. Business IS the pump in case you are not aware. Obamacare didn't prime it--it SMASHED it!

    4. The hammers are an easily understood METAPHOR. I could have just as accurately used the fact that it now takes upwards of $15k per year to "educate" children in the NYC public schools. Or that government provided medical care has caused its price to soar. It would just have taken a little longer to explain.

    5. You are right, tax cuts without spending cuts have NO effect. Its no different than you deciding to pay on your credit card rather than in cash. Both Republicans and Democrats are clueless to that fact. I've written about this previously.

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  4. CarolynPrescott@web.deSeptember 19, 2011 at 4:45 PM

    Again, no facts that support your point of view, just a boatload of opinion.

    1. Most workers have pension plans, why should government workers not have them? Who are you talking about who is "moaning" about their pay? No one is complaining, just stating the fact that govt. workers are not at all overpaid if you compare them to those who do comparable work in the private sector.

    2. I asked if you or your family had benefitted from programs like the GI bill, VA home loans, National Defense student loans, Medicare, etc.?

    3. Government has primed the pump many times, not just after the depression. In the case of recent decades, taxes have gone down steadily but the private sector is NOT investing as a result; many are making money on their money but they are not investing in businesses that hire people to make things or provide services (other than financial services). Many businesses were in favor of the health care bill because the cost of health care makes it so hard to add jobs. The cost of health care goes up in part because there are so many uninsured people, and insurance companies have been able to eliminate the sick or those in high-risk categories. Those people are treated (according to the Hippocratic oath and because most of us do not believe that people should have to die or go untreated) and that cost is folded into the bills the rest of us pay for treatment and insurance. As long as a sixth of the population is not covered, medical care will keep going up.

    4. The hammers are not a metaphor; they actually were part of a defense department billing process. You try to present them as representing the way that government always operates, but that's very inaccurate. Business can also be very, very inefficient, by the way. Think of the small town in south Texas where everybody and his brother has had a gall bladder operation because a local medical practice was making a bundle on it. Or look at some of the private sector subcontractors in Iraq. Business and government can both be good or bad, efficient or inefficient. It's up to citizens to make them work more efficiently.

    5. And actually, the national debt is NOT very much like household debt.And the national debt is not the same as the national budget. Now is a terrible time to cut govt. spending drastically; now is when we need government to act and to spend-- because the private sector is looking pretty damned lame, even after we bailed them out.

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  5. to CarolynPrescott@web.de:

    You are just proffering a "boatload of opinion" yourself with no facts to support your statements.

    1)Most workers do not have pension plans. They are not generally offered in private industry anymore and primarily exist in union (police, firefighters, manufacturing, teaching and so on) positions.
    2)I don't know about the author but my family has not benefited from any of those government programs.
    3)Government has "primed the pump" (or printed money) on numerous occasions but in each case there were very different underlying variables at play so it is irresponsible to say that it 1)is always appropriate 2)always successful or 3)necessary.
    4)Why are you arguing about the $500 hammers? It is true and being used as a symbol --or metaphor--for government inefficiency. There are 1000's of those stories. Guess what? Most medical fraud and waste is via Medicare and Medicaid. It is not up to individual citizens to make them more efficient because 1)we have no power to do so and 2)the government has taken on the role of deciding what is and isn't good, bad, efficient, inefficient, appropriate or inappropriate.
    5)DEBT is DEBT. The ramifications of too much debt are the same whoever the debtor. If we are to listen to your "boatload of opinion" then I suggest we take a good hard look at Greece and the rest of Europe who have be doing exactly what you suggest is the right course of action. Take a look at Canada for an example of near collapse. They realized that their (and ours) system doesn't work long term and made much needed changes.

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  6. Of course, these are my opinions. But they are supported by facts and logic.

    1. I don't know where you live, but I can honestly say that no one I know except those employed by the state or federal government has a pension plan.

    2. Of course they have. They've paid taxes so why shouldn't they? Like I said that doesn't means that government is above reproach, does it?

    3. The private sector is not hiring because it makes absolutely no sense for them to do so. Just because a company has money doesn't mean it has to invest it unless it can make a profit. That is the American (and Chinese, Russian, French, English,...etc.) way. [The Russians and Chinese tried the other way--no profits--but that didn't work very well.]

    The President has made it so expensive to hire anyone that, surprise, they aren't. The math is easy to understand--if I double the cost of a car, are you more or less likely to buy one? There is NO difference. [If the tax increases that the President has proposed are actually adopted, I PROMISE you that in 6 months unemployment will be MUCH worse than it is today.]

    As to the cost of medical care, this is simply a matter of prices rising because the demand is higher than the supply. Increasing demand further by paying for the healthcare of every 300+lb or drug addicted American makes that situation worse. Reducing supply by limiting doctors' incomes does too, since, despite the Hippocratic Oath, most doctors don't work for free.

    4. The hammers were used a metaphor for government overspending on everything it does. I'm not aware of the medical practice in Texas that you mention, but I'm pretty sure that what it committed was Medicare fraud. As to the subcontractors in Iraq, they are also paid the government--you make my case. If you believe that these are failures of the free-market I understand your skepticism. The problem with your logic though is that neither would have occurred without the government, which is very bad at controlling costs for many reasons, including fraud--one of the main points of this post!

    5. If the government spends more than it takes in it has to borrow the rest, which has a cost. Money doesn't grow on trees. Just ask Greece. The government may be able to print it--that's why your food costs so much more now than it did when President Obama took office.

    This blog is about logically thinking outside the box, since so many of the answers in the box have not worked. That being the case, to me the only way to increase employment is to make employees more valuable to employers, a novel concept to many. To do that you need to create surplus demand. And that doesn't happen by making pariahs of employers, as the Democrats seem inclined to do.

    The Bush tax cuts failed because spending was not cut as well. We wanted our cake--and to eat it too. So, using the math I've laid out previously the expected result would have been nil. Unfortunately it was actually worse because spending increased as well. But the answer now is not to raise taxes when the economy is suffering. I don't even know how the President can suggest that with a straight face. JFK was a proponent of lower taxes at a time of economic stress. If I'm a Democrat I think I'd rather hang my hat with him than President Obama.

    I appreciate your comments, though the nasty intro was uncalled for.





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  7. CarolynPrescott@web.deSeptember 20, 2011 at 3:59 AM

    You're wedded to your belief that government is the problem; you're "pretty sure" that a private sector transgression was really a government problem. It's not going to get us anywhere to continue; you're not interested in facts, much less in reason.

    The point of my asking you if you have benefitted from these programs is that a great many people were able to get into the middle class because of such programs; now they see them as evil. What an irony.

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  8. to CarolynPrescott@web.de:

    ...And you are wedded to your "belief" that government is the solution. You are doing precisely what you have repeatedly accused the author of--proffering your opinion as fact. You have offered no facts just your opinion and observation. Initially your question about whether the author or the author's family had benefited from such programs was clearly done to mock him/her as a hypocrite. Most government programs are just taking money from one person/s and redistributing as money, goods or services to others, for example, Medicaid and mandated Union labor on government "infrastructure" projects. If those programs have artificially propelled a person/s into the middle class then they really aren't middle class. They are middle class on the back of someone else's dime and labor and the guarantee that said middle class existence will be able to rely on, in perpetuity, money and services that they themselves haven't earned. That is the irony! If a person gets into college due to affirmative action programs and then fails or struggles later, when said forced benefit disappears and the person has to sink or swim on their own(assuming that they do), it is no different. They didn't get there on their own. You are not interested in reason or logic and you have presented no facts only YOUR opinion. So why do you keep coming back to mock the author? You disagree and you have nothing to add so walk away.

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