Tuesday, August 21, 2012

Spending Cuts, Raise Revenue, Economic Growth

About 40% of the US federal budget is currently borrowed. That’s crazy, right? We actually had a surplus under Bill Clinton. We didn’t borrow anything for the last four years of Bill Clinton’s administration. We need to get back to that. Well, there’s 3 ways to close that deficit.
1.       Spending Cuts
2.       Raise Revenue
3.       Economic Growth

Let’s first look at cutting spending. A lot of people feel like President Obama has exponentially increased federal spending when in fact under President Obama spending has risen at the lowest rate since the 1950s.
So far under Obama spending has risen by 1.4%. This is significantly lowers then any president since Dwight Eisenhower and in comparison to Bush’s 2nd term of 8.1% is much lower. But this doesn’t happen in a vacuum. The Federal budget is not like a family budget. Some targeted spending leads to more economic growth and some just becomes wasteful and adds to our deficit.  In contrast to a family budget sometimes you have to spend money to make money. So, the spending cuts should not all be considered a zero sum game. In some cases when we make cuts to the federal budget we end up losing more economic growth then the cuts are worth. In turn we can actually make the budget deficit bigger by cutting spending to things that will create economic growth and tax revenues.
Of course Democrats as well as Republicans want a balanced budget but cuts alone will not do it. And if we cut investments in our society that actually have an economic benefit to our country then we actually make the deficit larger. We do need to make targeted cuts but we also need targeted deficit spending so we can continue to invest in our society help our economy grow.

This means raising taxes. Of course no one wants to pay higher taxes but paying taxes does give us many benefits. In a time of recession we don’t want to raise taxes on the poor and middle classes who are struggling just to pay their bills. These people spend a majority of their paychecks every time the get one and that money directly stimulates the economy very quickly where the richer you are the more likely that your money will move much slower though the economy in effect not creating jobs fast enough. In a recession richer people are more hesitant to invest or spend so just as a practical issue it does not help to give them tax breaks.
As I’ve said before WE BORROW 40% OF OUR FEDERAL BUDGET. It should seem obvious that along with spending cuts we need to raise some taxes. All we are talking about is raising taxes back to 39% from 35% on the top wage earners. This will help put us on a path to close the gap and balance our budget. The top wage earners in our country have done much better than the rest of us over the past decade or two do in part to a tax code that has given them too many breaks. It is not unreasonable to raise their rate to 39% when historically the rate has been well over 50% for the past 100 years and hit a high of 92% under Republican president Dwight Eisenhower. Those numbers seem unfair and the Democrats are not proposing anything near that.  Raising the top tax bracket to 39% seems fair as well as something that we need to do to start to address our budget deficit.
The other thing we need to address are the loop holes and capital gains tax rates that many of the richest Americans and biggest corporations can use to avoid paying their fair share of taxes. Last year the largest corporations in America averaged paying 9% taxes to the government when the tax rates for corporations vary from 15% to 35%. I assume they pay the 9% tax rate in a legal way though using corporate loop holes but this is not fair and not beneficial to our country. Then when you look at a capital gains tax that is set of a flat rate of 15% no matter how much money you are making I think that number needs to be changed for the top earners.  I do believe that 15% is a good number to encourage investments but when someone is making millions of dollars on capital gains and with loop holes is able to pay less than the average hard working American, I believe that to be unfair. We should have a progressive tax rate on capital gains so that once you are making a large amount of money from investments then you should pay taxes equivalent to what you would pay if you had earned that money working hard for a living.

The last 9 or 10 months of the Bush administration and the first 9 or 10 months of the Obama administration we were hemorrhaging jobs. We were losing between 300,000 and 800,000 every month. At that time it was almost universally agreed upon by both the Democrats and the Republicans that in order to stop the job losses and to encourage economic growth we needed a big stimulus and also needed to bail out some of our major industries. This is something no one wanted to do but we saw that it was needed and came together to prevent a depression. Now that the stimulus and bail outs have worked to save us from a depression we have cut spending so much that growth has flatland. Of course unemployment has been going down slowly and since the beginning of 2010 we have added private sector jobs to the economy every month but it’s been a slow recovery. But we were in a deep hole and we are coming out.
Obama seems to be a very compromising president and has not raised taxes or increased spending when these things seem to be needed if we what to grow our way out of this economic turndown. We can all see schools with less teachers, cities with less policemen, and a general cut back on all of the services that our government provides us. When we cut those jobs then it creates a multiplier effect where more people are no longer working in the public sector and are now competing for jobs in the private sector. This creates higher unemployment and is a downward spiral of less and less economic activity.
Now there is also a multiplier effect going the other way when we invest in our society. Obama did use some of the stimulus money to try and save public sector jobs which allows for more people to be put to work and those people spend money which in turn creates economic activity creating jobs in the public sector. Although some of this has been done I believe that we have not seen fast enough growth because stimulus spending has been slowed down to a trickle.
We need to spend more money on bridges and roads, research, education, and all kinds of government projects in order to get the economy moving in the short term and in the long term. Some of these projects are more productive than others but when something like a “bridge to nowhere” seems to be an obvious mistake, that doesn’t mean we should cut back on building and repairing all bridges. We just need to decide which projects will give us the most bang for our buck and invest as wisely as we can. Public works programs can create economic activity that actually creates revenue for our country that ends up being larger than the amount the projects cost. We need to have a debate on what programs are investments that create growth and what projects cost more money than what they are worth. But we need to invest in our society if we want to come out of this economic downturn quicker.

So, in closing. Yea, let’s make some targeted cuts. Let’s raise some revenues on people who can afford it so we can start to close our budget deficit. And let’s invest in our own country to promote growth which also raises revenues so we can be a more prosperous country.

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