Three Guiding Themes

It occurs to me that there are at least three (maybe more) guiding themes in our national economic debate.

One is that the deficit that will begin to strain us in fifteen years or so, is more important than any other problem facing our economy today. And that in order to avoid fixing it by raising taxes on all of us (to, say, pay for increases in health care costs), the only way we can address it is by putting a huge burden on certain target groups (the poor, the elderly, the sick and US infrastructure).

That’s not true, of course, and nearly every economist who studies the subject could tell you that. On the one hand, no one denies that the deficit has grown dramatically in recent years (mainly due to tax cuts and wars of the early 2000s, and the recession of 2008) and should be addressed, but addressing it now, during a “jobs recession” (7-8% unemployment), is damaging, irresponsible nonsense. I’m sure that there are a few economists around the country who would disagree with that, but they are nowhere close to a majority.  When there aren’t enough jobs to go around, cutting even more jobs and incomes, is foolish. It is the last thing you want to do to fix the problem.

The second is the related belief that the best way to get our people back working again is by cutting funding on programs for old people, poor people and sick people and physical infrastructure. This belief says that if we cut spending for the health care, income, retirement, or jobs, for a large percentage of our population, then we’ll (eventually) be okay. Instead of solving our deficit problem by spreading around the pain just a little bit on all of us (read: tax increase), we should pick certain target groups (read: old, sick, and poor) and have them carry the load for us.[1]

This, too, is wrong. You can see that objectively by looking at how slow our recovery has been in the last four years. In spite of the fact that the private sector has begun to claw back, the economy over all has still been sluggish because of the huge numbers of people fired or cut back by state and local governments. Their cut backs have taken large numbers of people out of the market. Those people are not buying things and that keeps the economy from growing.

And look at the draconian austerity programs in Europe. The wealthy countries have forced such deep cuts on the poor countries that unemployment has exploded, causing tax revenue to collapse, such that instead of lowering the deficit through lower expenditures, they have actually increased the deficit because of fewer number of tax payers. If you use cut backs to lower the deficit, you usually have to make at least three rounds of cuts to get the spending down below income. When you make massive layoffs, you lower your expenditures, but you also lower the number of job holders who pay the taxes that pay down the deficit. So the deficit goes up, even though your out-go has gone down. You have to make three or four slashes of jobs and livelihoods and families in order to have the shrunken, dysfunctional government that can be balanced by cutbacks only. Again, look at Greece or the repeated rounds of cuts to jobs, salaries and pensions in our state and local governments to see this in action.

The problem in a recession is too few jobs. People are out of work, so they don’t pay income taxes and they don’t buy things, so they don’t pay sales taxes. And that drives up the deficit because their tax money is not going into the government and the government is paying out in food stamps, unemployment, etc. When people are out of work and not buying, then the merchants are not making anything and they don’t restock or hire new people. So, it “trickles” down to the plants and farmers. The only entity large enough to put people to work is the government, so it needs to step in and do some spending and hiring and put people back to work as a stimulus to the merchants, plants and farms. Once they start seeing more cash in their pockets, they’ll spend more, and the merchants will hire more workers and buy more from the wholesalers, etc. Until finally the economy can manage on its own. This is not rocket science.

Trying to make big federal cuts in the budget deficit right now would throw the economy back into a recession, which will enlarge, not shrink, the deficit, just as it has done in Greece and Italy, and just as it did in the American state and local governments. Firing people lowers demand and lowers government income from taxes, which drags on the economy. 

The third guiding concept is that “Supply-side” economics, the theory that if you give more and more tax cuts and benefits to large corporations and wealthy individuals, it will eventually “trickle down” to the average worker, because the wealthy and corporations are America’s “Job Creators.” I think that on this theory, the percentage of economists who would agree with this notion would slide down to almost zero. You can see some now and then being interviewed on Fox News, but in the real world, they are extremely rare.

Large corporations are simply not the major engines of growth for jobs. Corporations hire people when the streets are filled with people with money in their pockets who are demanding their products. The idea that a corporation would hire thousands of new workers in the middle of a job recession, in the hopes that people would buy their items even before they have incomes, is not just illogical, it can also be proven wrong easily by the research. Historically corporations only hire when the economy is on the upswing. Companies do not create jobs on the hopes that the economy might get better by their doing it.

Now, this is not to say that some new companies are not starting up. There are a lot of entrepreneurs out there who have an idea for a niche that has not yet been filled. But (a) they are not the giant corporations that many in congress have worked so hard to create tax breaks for, and (b) they often survive because they found a niche market that no one has yet gotten into. They are not a giant corporation that just decides to hire people in the belief that unemployed people will buy their product.

If more people have jobs, they will pay taxes and buy things and merchants can stay afloat and stock supplies and buy from wholesalers, and manufacturers will take on new people to meet the demand, who will in turn go out and buy things etc., and the economy will start to get back on its feet. An economy grows from demand, not supply. You can “supply” all the goods in the world to the market, but if there are no “demand” (partly because the government has fired workers and cut pensions and salaries), then the economy is not going to recover.

Finally, with so much of our national wealth being held in the hands of so few, there is less to go around for the “real” economy down on the ground. That’s not precisely true, because money is fungible and can be created, but for the last thirty years, such a huge amount of money has been sucked up into such a very few number of hands, that the end result has actually been not enough money to go around to fund jobs. Too many people needing incomes, but not enough money to fund them. Too few dollars being chased by too many job seekers.

One thing that needs to be done is to return the tax cuts to the levels they were before the Bush administration. It’s hard to believe this, because it’s seldom reported, but there are a good number of very conservative economists (Alan Greenspan, David Stockman, etc.) who now argue that the tax cuts were a mistake and we need to revoke them. All of them.

Second, we need to create a nation-wide jobs program to get America back to work and stimulate the economy, paid for by the money that we will now have from the return of tax income.

Which is to say, we should be doing exactly the opposite of what we are now doing, which is cutting spending and cutting taxes. Or to put it another way, what we are doing is cutting growth and cutting income. Or, to borrow an over worked, over blown phrase, we have declared a “war on” growth for America.

[1] I’m saying “cutting funding on…” these programs, but as many Republicans and Libertarians point out, few people are actually proposing cutting those programs; they are proposing cutting the growth of spending on those programs. And they ridicule liberals and Democrats for saying the programs will be cut. What they are actually proposing are cuts in the growth of those programs down to below the growth of the cost of living. That distinction should be made clear. So that, say, the economy may grow at three percent and Republicans propose cutting the growth of Medicare to just two percent. It is still growing, just not enough for someone to pay the bills. They are right to claim that they are not cutting the program and still allowing the program to grow, though that is a distinction lost on the eighty-five year-old blind paraplegic widow in Cincinnati, who now has to pull the extra one percent for her meds out of her food budget.