Spending or Income?
Whether tax cuts or government spending are the best way to boost the economy in the current fiscal crisis.
Many Republican lawmakers and commentators have recently exhorted tax cuts as the best medium for lifting the economy out of its slump. At the same time they decry a stimulus based on government spending as leaving an intolerable fiscal burden to our children as well as encouraging corruption by handing over bulging money bags to Democratic Governors. Are tax cuts more viable as a stimulus? First there is the argument that the government will not be over-spending and therefore the deficit will not increase. A moments consideration will show this is a fallacy. A reduction in income is the same as an increase in expenditure, a good part of or current debt, $1.35 trillion comes from the tax cuts enacted under George W Bush. Of course the government could cut programs in tandem with the tax cuts, although this would increase unemployment as well as taking away the lucrative Federal contracts that do much to boost corporate profits.
Tax cuts, as a stimulus, are very inefficient, in today’s economic climate the majority of people will use the extra income to pay down debt. Very laudable, very sensible, but that would do nothing to boost our economy. As proof of this one only see where the tax refund of the Bush era went, and that was a blanket amount going to rich and poor. A tax cut, by definition, would benefit those with a higher income, they pay more taxes. Given the financial junket that everyone has been on for the past decade, it is hard to imagine that a wealthy person, given more disposable money, will rush out and buy American made products; rather they will use it to speculate, looking for the highest possible return, thus exacerbating the problem. In addition there is the problem of reduced revenue which will make it more difficult to pay for the government programs already in existence. Many people may hail this as a good thing, but one of the programs it will affect is unemployment benefits. Thus tax cuts will not create any more jobs, rather the reverse for the majority of manufactured goods are now made abroad, and unemployment will continue to rise. Any substantial reduction in the social safety net could quite feasibly lead to social unrest and very probably an increase in crime, at a time when the state governments are seeing an even greater revenue shortfall and looking to layoff employees, police and corrections included. I can only imagine that the proponents of tax-cuts have a second home on some idyllic isle to which they can fee when the going gets rough.
But will the government spending work? Yet another criticism of the stimulus package has been that there are not enough ’shovel-ready’ projects to substantially alter the trend of a shrinking work-force, and, if we take the phrase literally, they are probably right. The phrase ’shovel-ready’ is a misnomer, it calls to mind the building of the highway system, or even the laying of the rail-tracks that prefaced the Long Depression of 1875-1894. Today’s workforce is very different and whereas there are plenty of construction projects to take up the slack of the burst housing bubble, there are also millions of sedentary low level government jobs which could be created. The reason I say low-level is two-fold. First, because we do not want the positions to be permanent. Once the economy starts to pick up these employees can move back into the private sector which will be able to entice them with better pay. The second reason is training, there are a host of positions in the clerical, health support and IT fields which could be instigated quickly. These positions would assist families as opposed digging or building which would only benefit the young and skilled. Critics on the right may be upset at this approach, yielding a far more bloated government, but their belief in the Capitalist system should prove to them that this is only a cycle and the shift from public to private sector will soon assert itself.
Henry Ford’s contention was that if you paid workers a good wage they would become your best customers. By the same virtue, if you employ people they ‘invest’ in the economy by means of purchasing consumer items, providing tax income and keeping their homes as a long term wealth growth prospect. People who are laid off become a further drain on the economy, have no money to spend, require expenditure in the form of benefits and end up in foreclosure which reduces the nations wealth; witness the sorry straits many banks are in due to the collapse in value of their ‘toxic assets’. Without massive government spending of the type contained in the stimulus package I contend that the legacy we would leave our children would be a failed state due to a collapsed economy.