DEFICITS AND DEBT
Because of life-long habits of prudence in managing household budgets, conservatives react emotionally against a federal budget deficit. It spooks them, but it shouldn’t.
The budget deficit is not the problem. Didn't ex-VP Cheney say, "Deficits don't matter."? The problem is rather a high ratio of National Debt relative to Gross National Product (ND/GDP). Like a home mortgage, our debt can be paid off over time and a low ND/GDP ratio assures a comfortable schedule of payments. That requires:
(1) That we invest in infrastructure to raise GDP. Concern about the deficit now is like worrying about the cost of running the pumps when the ship is sinking. Our creditors will be patient as long as the economy is running strongly and efficiently at capacity.
(2) That we accelerate recovery to keep ND low. According to Nobel laureate economist Dr. Paul Krugman, Obama’s budget is much too small for quick recovery. But it is still large enough to scare conservatives. A study of the Great Depression (GD), WW II, and its aftermath should calm their fears. We got out of GD I and we'll get out of GD II – but only if we listen to a Nobel laureate economist instead of the conservatives.
HISTORIC LEVELS OF ND/GDP
At the peak of WW II spending, the ND/GDP was 128? Post-war growth with a high tax rate lowered it gradually to 25?ntil Reagan almost doubled it to 50?y halving the tax rate. Bush (41) raised it to 65?Clinton lowered it to 33?and Bush (43) raised it back up to 40? Under the worst case scenario, Obama's ND/GDP will be less than 80? And after recovery, with tax rates at Reagan’s level, the debt level will drop back over time to 25?r less.
Germany, France, and Canada have their ND/GDP at around 65? Italy’s level is over 100? At its worst, Japan’s level was over 185? All of these nations are fairly prosperous and are without serious inflation. And if you are comparing tax rates, be fair: count your health care and education costs as an equivalent tax.
And don’t take their citizens’ complaints too seriously. We fall behind them in measures of food quality, infant mortality, health care, obesity, education, vacation time, retirement benefits, transportation systems, and more. How many French immigrants do you know?
STIMULUS ECONOMICS 101
With stimulus funds, government invests in public infrastructure
=> Government-financed jobs created
=>Workers receive salaries
=> Workers buy goods and services
=> Inventory is reduced; services hire workers
=> Goods inventory is exhausted
=> Goods manufacturing resumes and increases
=> Private investment in manufacturing and distribution
=> Privately-financed jobs created
Conservatives of the 1930s did not let FDR spend our way out of GD I. But, in the 1940s, Hitler and Tojo made him spend every dime we had putting everybody back to work or into uniform. The economy really went “socialist” for four years, with the government hiring almost everybody, directly or indirectly. Contracts, prices, wages, gasoline, and other supplies were strictly controlled and rationed.
WW II ended GD I. When it was over, people cashed in their war bonds, bought cars and homes, and created our suburbs. There was some inflation but it was allowed because it stimulated the construction industry. Uncle Sam paid for the college education of millions of veterans and practically gave them a home. More stimulus spending occurred via the Marshall Plan, which financed European purchase of US goods; the Korean War, and Eisenhower’s Interstate Highway Program. Indeed, the Cold War can be seen as one huge work-relief program that provided decades of historic economic expansion for the middle class. The rich did pretty well too, even with tax rates that were at least twice today’s rates. And if all that war-related spending could have been invested in domestic infrastructure, we would all be getting those monthly checks that Gov. Palin sends out.
And still there are idiots who believe that stimulus doesn’t work!!
The current economic crisis was caused by three decades of Reaganomics (see: http://www.geocities.com/thereaganyears/kangas2.htm)
and disastrous deregulation (see: http://www.motherjones.com/politics/2008/05/foreclosure-phil).
Now, let’s fix it!!
Since consumers won’t spend and entrepreneurs won’t invest during a recession, the government must. We have to put people to work improving infrastructure (including transportation, education, health care, and green energy). And we have to stimulate the economy until inventory runs down and production restarts, sparking new investment.
INFLATION AND TAXES
Our problem now is not inflation, but rather deflation. We have already licked 20?nflation and know how it’s done, but even 1?eflation would put us on a dangerous slippery slope. Consumers won’t spend a dime today when they know that prices will drop tomorrow. The economy would freeze up like the South Pole.
Payroll tax cuts for the poor and payments for the unemployed do make sense. They will spend every cent of it and put it back into the economy. But tax cuts for other individuals will only be squirreled away for a rainy day. Scared consumers are now saving at a higher level than they have in three decades.
Entrepreneurs, including foreigners, won’t find many safe deals outside the US and they won’t keep their money under a mattress. Regardless of high tax rates, they will take the best deal they can get right here, as they did from 1950 to 1980. In a recession, new investment comes only with renewed consumer demand, not with tax cuts.
Claiming to cure a recession, demagogues offer tax cuts to bribe middle and upper class voters. Unfortunately, there are many in the bottom half of the IQ spectrum that will sell out their heritage and their posterity for a little extra pocket change. Let’s hope that there are enough of the others who understand the true meaning of patriotism.