Economic Policy and Consideration of Fiscal Consolidation Domestic and Global
by Kikibird Hinlo on Thursday, September 30, 2010 at 6:41pm
9/30/2010 Per a source I read today (International Monetary Fund 2010) , by the end of 2010 our govt debt will be equal to 100% of GDP! What to do. Fiscal consolidation suggests raising taxes and cutting spending, which may hurt in the short term but help some in the long term. The choices are as follows:
Raise Taxes / Cut Spending FISCAL CONSOLIDATION
Raise Taxes / Increase Spending
Lower Taxes / Cut Spending
Lower Taxes / Increase Spending
Much thought must be given to each scenario for both short term and long term implications. The chief problem that we have to stay focused on is one of these has to be a solution to both debt reduction and revitalizing economic conditions. Not only do we have the aforementioned considerations, but, globally other advanced countries face the same economic problems, such that the balance of imports and exports for each is an issue that also comes into play. We will not all be successful if we all implement the same solutions for sure on the global level. My focus here though will be action that should be taken in the United States.
Looking at the scenarios above, one can simplify the choices by using household finance as a model. If you spend more than you make, you are in debt. If government spending is more than tax income, it too, is in debt. If you are unemployed, your household is in financial peril. If there are many unemployed, the government's tax income is in peril. That's about as much comparability as there is, because so many more issues complicate the governmental economy such as ripple effects from every action. For example, increase taxes, and owners of resources suffer hits to their bottom lines, so in turn they may eliminate jobs to cut costs thinking they are saving money. That spikes unemployment, decreases the income tax base available to the government which in turn presents budgetary problems when it is at the current high level. With it come increased demand for govt aid programs like food stamps, medicaid, unemployment benefit extensions, student aid, and so many others. More govt services are demanded with less money paid into the coffers to fund them. With higher unemployment comes lower domestic consumption, which ripples through the retail as well as service sectors, furthering the trimming of employees to offset lost revenue, which further exasperates the problem.
Then enter the idea to provide "stimulus" to the economy. This commits money which increases govt debt in hopes of "hot wiring" the economy back into running order. Quite frankly, if you send a check to every American for $600 and they spend it, there will be a spike in sales/revenue for the given period, and that's it. Results will be flat after the period of short infusion of cash is over, and the same problems will reside, no long term result will be achieved other than lobbing on additional debt.
It will take me a lot of time to develop this paper and core argument, but my solution is this: cut taxes, maintain programs and increase spending in some ares, BUT the key is to GROW the tax base!
I believe the tax cut that will encourage owners of resources to expand, hire, buy assets (which creates more jobs to mfg the assets elsewhere at another plant) which will reabsorb some of the unemployed. When this happens, govt service consumption will drop from moving the unemployed to employed status and they will be back to contributing to the tax pool. The only increase in spending I approve is that which will create a new venture to fill a currently unmet need in order to sustain new employment for the unemployed whose skills are limited. (Note: not all unemployed have limited skills, that is not what is being said here. I am referring to the unemployed who are limited, these are the ones who will never get re-absorbed into employment that paid the same or more because for one, their jobs are gone to cheaper labor elsewhere, and two, they do not have any skills in demand with value equal to the wages they want.)
As a society if we want to fix this current mess, we have to help the unmarketable people re-enter the job force so that they are contributing to the tax base, and also provide opportunities for young and new entrants to the work force to have viable employment so they too contribute to the tax base. It will be the contribution of MANY to the tax base that will not only ease the burden but provide money to reduce the debt! It's crazy to even think the existing workforce should be burdened with bailing everyone out by raising their taxes, it isn't mathematically possible, nor is it a fair proposal!
So therefore, I am not in favor of solution 1 or 2 above. I am inclined to go with number four, lower taxes and increase spending, which I know sounds counter-intuitive. But I believe coupling that option with targeting the spending at creating strong contributors to the tax base will work in the long run, and will because of the "economies of scale" concept. You have to spend money to make money, and each unit can be cheaper when you can produce many efficiently. That is how I see taxing a greater number of tax payers at a lower rate. Expand the tax base, and each "unit" can pay in less because there will be a far larger number contributing! Would you rather sell 10 widgets for $100 ($1000) or 100 widgets for $50? ($5000!) Sell more of them for less (assuming the selling price can be such because you can mfg with economies of scale!) Same with tax payers, have more of them, paying less. That is a win for everyone! The key then is to find what the least skilled of the unemployed can do that will be of value.
I think at the local level, unemployment offices have to be made aware of the labor that is in demand, and respond by vigorously providing vocational training that will yield a qualified individual suited to meet the need. This training should be aimed at low skilled unemployed as well as others seeking jobs who are NOT registered with them. There are some training programs now, but they are limited and I do not think aggressively or tactically designed. I think time needs to go into inventorying existing skills and aptitudes as well to create good enduring matches for these individuals with jobs. I think if weaknesses in basic math and English exist remediation should be mandatory. There are some limited skilled unemployed who wanted to go to school but could never do it because they were responsible to their financial obligations and could not afford to do it. Therefore, the unemployed with academic potential should be identified and given incentives to pursue an education! This should include bold measures to help support them while in school. (Welfare's only criteria is that you are poor and have children, so why not "school welfare?") It's a small investment cost to help the individual meet basic living expenses while in school, and in turn get a high functioning member of society as well as contributor to the tax base in 2 to 4 years.
Raise Taxes / Cut Spending FISCAL CONSOLIDATION
Raise Taxes / Increase Spending
Lower Taxes / Cut Spending
Lower Taxes / Increase Spending
Much thought must be given to each scenario for both short term and long term implications. The chief problem that we have to stay focused on is one of these has to be a solution to both debt reduction and revitalizing economic conditions. Not only do we have the aforementioned considerations, but, globally other advanced countries face the same economic problems, such that the balance of imports and exports for each is an issue that also comes into play. We will not all be successful if we all implement the same solutions for sure on the global level. My focus here though will be action that should be taken in the United States.
Looking at the scenarios above, one can simplify the choices by using household finance as a model. If you spend more than you make, you are in debt. If government spending is more than tax income, it too, is in debt. If you are unemployed, your household is in financial peril. If there are many unemployed, the government's tax income is in peril. That's about as much comparability as there is, because so many more issues complicate the governmental economy such as ripple effects from every action. For example, increase taxes, and owners of resources suffer hits to their bottom lines, so in turn they may eliminate jobs to cut costs thinking they are saving money. That spikes unemployment, decreases the income tax base available to the government which in turn presents budgetary problems when it is at the current high level. With it come increased demand for govt aid programs like food stamps, medicaid, unemployment benefit extensions, student aid, and so many others. More govt services are demanded with less money paid into the coffers to fund them. With higher unemployment comes lower domestic consumption, which ripples through the retail as well as service sectors, furthering the trimming of employees to offset lost revenue, which further exasperates the problem.
Then enter the idea to provide "stimulus" to the economy. This commits money which increases govt debt in hopes of "hot wiring" the economy back into running order. Quite frankly, if you send a check to every American for $600 and they spend it, there will be a spike in sales/revenue for the given period, and that's it. Results will be flat after the period of short infusion of cash is over, and the same problems will reside, no long term result will be achieved other than lobbing on additional debt.
It will take me a lot of time to develop this paper and core argument, but my solution is this: cut taxes, maintain programs and increase spending in some ares, BUT the key is to GROW the tax base!
I believe the tax cut that will encourage owners of resources to expand, hire, buy assets (which creates more jobs to mfg the assets elsewhere at another plant) which will reabsorb some of the unemployed. When this happens, govt service consumption will drop from moving the unemployed to employed status and they will be back to contributing to the tax pool. The only increase in spending I approve is that which will create a new venture to fill a currently unmet need in order to sustain new employment for the unemployed whose skills are limited. (Note: not all unemployed have limited skills, that is not what is being said here. I am referring to the unemployed who are limited, these are the ones who will never get re-absorbed into employment that paid the same or more because for one, their jobs are gone to cheaper labor elsewhere, and two, they do not have any skills in demand with value equal to the wages they want.)
As a society if we want to fix this current mess, we have to help the unmarketable people re-enter the job force so that they are contributing to the tax base, and also provide opportunities for young and new entrants to the work force to have viable employment so they too contribute to the tax base. It will be the contribution of MANY to the tax base that will not only ease the burden but provide money to reduce the debt! It's crazy to even think the existing workforce should be burdened with bailing everyone out by raising their taxes, it isn't mathematically possible, nor is it a fair proposal!
So therefore, I am not in favor of solution 1 or 2 above. I am inclined to go with number four, lower taxes and increase spending, which I know sounds counter-intuitive. But I believe coupling that option with targeting the spending at creating strong contributors to the tax base will work in the long run, and will because of the "economies of scale" concept. You have to spend money to make money, and each unit can be cheaper when you can produce many efficiently. That is how I see taxing a greater number of tax payers at a lower rate. Expand the tax base, and each "unit" can pay in less because there will be a far larger number contributing! Would you rather sell 10 widgets for $100 ($1000) or 100 widgets for $50? ($5000!) Sell more of them for less (assuming the selling price can be such because you can mfg with economies of scale!) Same with tax payers, have more of them, paying less. That is a win for everyone! The key then is to find what the least skilled of the unemployed can do that will be of value.
I think at the local level, unemployment offices have to be made aware of the labor that is in demand, and respond by vigorously providing vocational training that will yield a qualified individual suited to meet the need. This training should be aimed at low skilled unemployed as well as others seeking jobs who are NOT registered with them. There are some training programs now, but they are limited and I do not think aggressively or tactically designed. I think time needs to go into inventorying existing skills and aptitudes as well to create good enduring matches for these individuals with jobs. I think if weaknesses in basic math and English exist remediation should be mandatory. There are some limited skilled unemployed who wanted to go to school but could never do it because they were responsible to their financial obligations and could not afford to do it. Therefore, the unemployed with academic potential should be identified and given incentives to pursue an education! This should include bold measures to help support them while in school. (Welfare's only criteria is that you are poor and have children, so why not "school welfare?") It's a small investment cost to help the individual meet basic living expenses while in school, and in turn get a high functioning member of society as well as contributor to the tax base in 2 to 4 years.
