Employment, Debt, Deficit & Austerity

Before we get into the details, let me point out that when a government reduces spending, it has to fire people.  If there is already high unemployment, this makes it worse.  Furthermore, these fired people now stop paying taxes, and collect unemployment benefits instead, making the government's financial problems worse. And finally, these newly unemployed people don't have much money for shopping, so the retail industry suffers a hit, and they order less stuff from manufacturers, and so on.  A policy like this, sometimes called austerity, just makes matters worse.

Just to be clear, the debt I'll be talking about is the total amount of money that the U.S. government owes, and that it pays interest on. The deficit is the difference between total government spending and total government income, in one year.  It should be clear that the debt is the result of having a deficit, year after year.  In order to reduce the debt we need to have an annual surplus instead of a deficit.

Deficit and debt are bad over the long haul.  It's quite important to reduce the deficit, and reduce it a lot.  But it does not have to be done immediately.  It's a long term problem.  The main reason to pay off the debt is because of the interest payments that have to be made.  Those are a significant part of the government's total expenses, but in 2011 they are still manageable, still less than what we spend on the military, for example.  But if the deficit remains high, the debt will rise, and the interest payment will eventually become unmanageable.  As we approach that point, interest rates will rise, because lenders will worry about the safety of their investments. Fortunately, that point is still a few years away, but the danger must be taken seriously.

Having 20% of the population under or un-employed is a very serious immediate problem.  That is the principal cause of our large deficit, because unemployed people don't pay taxes!  There is no doubt that stimulus works if it's the right kind.  Giving money to wealthy people doesn't do it.  Same for giving money to large corporations.  What does work is either the government hiring people directly, like Roosevelt did, or letting contracts to private companies for goods or services that require workers immediately.  Since the nation has thousands of roads and bridges that are in serious disrepair, this one is a no-brainer.  Do you remember the bridge that collapsed in the midwest a couple of years ago?  That's pretty serious. That should have been a wake-up call, but it was not heeded by our dysfunctional congress.

But hiring people, or letting contracts, requires money.  If the deficit is already a problem, how can the government spend more money, and where will it come from?  The answer is that you have to go where the idle money is, and that location is well known today.  It is in the financial accounts of large corporations and very wealthy individuals.  If we were to simply return to the taxation policies of 1960's and 70's there would be plenty of money for hiring people and letting contracts.  Our financial problems today are in large part due to a steady reduction of the tax rates on high incomes that began in the 1980's and continue today.

What I'm saying is: Increase taxes on the rich and use the money to fix and build roads, bridges, railways, airports, high speed internet lines and hospitals.  Also use it to train medical workers and technicians in industries with shortages of skilled labor.

When you hire unemployed people you not only remove them from the unemployment lists, but they then have money to spend, which they do. This spending increases demand for goods and services, resulting in more hiring, to produce those goods and services.  It's a positive feedback process.  OTOH, if you give tax breaks to wealthy people, they invest most of that money, and so the economy is not stimulated very much.  (This would be different if the nation had a shortage of capital, but that is not the case.)  The newly employed people also begin paying taxes again.

There are false myths being repeated endlessly by some in public life. One is that if you tax the "job creators" you will hurt the economy.   Well, the evidence is clear: those job creators have been sitting on huge piles of cash for several years now, and they are not creating jobs.  30 years ago, when they WERE creating lots of jobs, they were paying MUCH HIGHER taxes than they are today.

It's when the economy is strong, and growing, that governments can, and should, reduce spending.

I just watched Obama's Speech about restoring a strong economy.

Did you catch it?  I'd be curious to hear your impression.

My impressions of course are those of a progressive, a formerly
enthusiastic supporter of Obama, lately a disappointed, un-enthusiastic supporter.

The speech was GREAT!  Rooseveltian!  He described a serious,
comprehensive plan to rescue the nation from the current economic
crisis, a plan that made very good sense to me.  Furthermore, he threw down the gauntlet to the Republicans, kind of daring them not to pass it. (my words, not his.)  If the Republicans continue with their attitude of the past several months they will not pass his bill.  The only thing that might get them to pass it, IMO, is fear, fear of serious disapproval by the voting public.  This speech, and the public's reaction to it MIGHT have that effect.  Only time will tell.

There is one serious flaw.  Obama said everything would be paid for,
but to do that he is relying on congress to pass serious tax reform.
I don't believe they are capable of that, even if they wanted to.

But I'll bet that this speech increases his approval rating, and I'll
bet that a strong majority of the public would want the plan to be
enacted.

For those who did not see the speech, it was unusual for Obama.  For
example, he said about ten times throughout the speech: "You should
pass this bill, now!"   It was a ballsy and challenging speech.

m

--
Tax the rich - build roads, bridges, railways, solar energy plants,
space vehicles, ...................

Earthchurch Again Looking for a Leader

Many months ago we thought we had found a new leader in Jon McLane, but that has not worked out, so we are again looking for a new leader.

I should have made that announcement several months ago. :(

My earlier post about Earthchurch needing a leader can be found here, dated December 2008.