American Economics-The issues

February 24, 2008: While it is true that the cause and effect of forces upon our economy are complex, I think the basic issues can be reduced to fairly simple concepts.  One of the questions one keeps hearing from conservatives is “How can we initiate these huge spending programs by the government without setting in motion large increases in inflation as government debt rises to seemingly astronomical levels in the future”.  A second question is “if this enormous spending by government will cause an increase in employment, will such increase be an indicator of economic growth?”  Will it cause a rise in the Gross Domestic Product by an amount that will result in incremental tax revenues sufficient to service that debt and to repay it in a reasonable period of time?”  What they are fearful of is that the increased debt and interest expense burden thereon will lead to higher tax rates that will more than offset the hoped for increase in GDP resulting from the multiplyer benefit of this temporary employment.  The more conservative voices in Congress are seriously concerned with the ability of the Treasury to get financing of the trillions of additional debt necessary to fund the special projects planned in the Economic Recovery Program.  If the Federal Reserve continues to increase the money supply in order to help the funding of this huge increase in debt, and if the economy does recover, they will then have to take steps to reverse rates which will likely make credit more dificult to obtain.  This is the dilemma that the Obama Administration faces as they try to find ways to legislate an improvement in economic activity.

The Conservative approach is to limit government spending to emergency objectives, reduce tax rates and let the market, the great equalizer of economic forces, do what it does best, find that price where demand and supply are in balance.  This conservative approach will depend on putting in place economic tax incentives directed toward corporations and middle and small businesses encouraging them to invest more in their business.  Many of our traditional brand name manufacturing and financial institutions would fail under this scenario.  The conservatives further believe that a favorable change by legislation in regulation for operating and tax purposes will result in significant private capital infusion into the economy which will exploit the opportunities brought about by this tax policy.  In this “tough love” approach, many financial institutions will probably fail, our largest automobile companies will go through bankruptcy and have to reorganize.  Unemployment will rise and the recession will undoubtedly worsen temporarily, but conservatives believe that this rationalization of excesses or distortions will lead to a sound if slightly smaller GDP.  Their belief is that this reduction in employment will be temporary as investors become more comfortable committing their capital reserve to investment risk and this will result in job growth without or with only a substantially lower increment in the countries’ national debt.

The key to understanding the interaction of government spending, taxation, employment and economic growth is difficult but my view is that since historical experience has shown that no matter how high or low the marginal tax rates are, the total amount of tax revenue received by the federal government in any given year has been a consistent percentage of average GDP, approximately 19%.  The primary objective of government, therefore, should be to stimulate or incentivize the private sector of the economy to invest and create or supplement economic growth.  Rising economic activity results in increased employment, not the other way around.  We are about to experience a period when the Obama Administration and the Democrat Congress put in place legislation, the objective of which is to get 3-4 million individuals employed.  It is not clear exactly how they will get this done except that the President speaks of and the Congress has recently passed an $800 plus Billion bill that does authorize certain spending much of which is for generalized purposes, i.e. health care, education, energy, infratructure, etc.  It is most probable that a majority or at least a significant percentage of these monies will be lost in the ramping up and adminstration of that spending.

I believe that unless this Administration decides to support programs to reduce corporate and individual tax rates, along with a reduction in its pump priming spending program, the debt service of this country will overwhelm any growth in America’s future GDP at least in “real” terms.

One Man’s Opinion–  Bud Brewer