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Why are people saying that a balanced Federal Budget won't work?
Original post made
by two cents, Another Pleasanton neighborhood,
on Jul 16, 2011
I think the proposal to have balanced budget on a Federal level is a great idea - we wouldn't be in the mess we're in if we had to do this all along. Right now Congress expects us to spend money on things that we can't afford to pay for as a country. It seems so logical to have a balanced budget, just like we do at home or sort of pretend to do as a state.
But the media and Obama (whom I voted for but will not again) are saying that it's not workable / not possible. Why not?? It's doesn't even sound like it would even happen all at once . . .
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Posted by Yet Another Teacher
a resident of Hart Middle School
on Jul 17, 2011 at 4:52 pm
Obama did not follow a classic Keynesian strategy. If he had done so, Obama would've kept his campaign promise to wind down the wars in Iraq and Afghanistan ASAP, and wouldn't have allowed the banks off so easily (to date, none of the Wall Street crowd have been prosecuted, despite massive evidence of financial fraud).
Had Obama followed a classic Keynesian strategy, Obama would've worked with the Democratic Congress to pass a much larger "stimulus" bill that would have been aimed at putting money in the hands of the American middle class and working poor. This strategy would have had these key elements:
*Huge investment in infrastructure (roads, bridges, schools, water treatment plants, etc.) over a 20-year period. This would have created at least 1.2 million new jobs and ones that can't be exported to India or China, since construction work must be done in the USA, of course.
*Military spending would be coming down instead of going up, with an eventual target of 80% of current expenditures (it should be 50%, but I'm realistic about the power of the military-industrial complex).
*More stringent regulations on the banks in conjunction with criminal prosecution of the key figures in what is, by any objective account, a massive multi-year international financial fraud that makes Bernie Madoff look like a petty pickpocket.
*Higher taxes on the rich. Not a bit more, but a lot more. One reason that corporations didn't pay their executives such outrageously high salaries from the end of World War II to the early 1980s was that the top tax rates were so high, it didn't make sense to get paid more, since the government took all of it, anyway. I'd settle for an effective 70% tax rate on anybody earning over $1 million a year, and taxing capital gains like ordinary income, instead of giving it preferential tax treatment.
The Republican Congress is, if anything, worse on all of these counts; they want to not only not move forward, but move backwards, destroying even the relatively weak new financial regulations that Obama and the Democrats passed in the first two years of the President's term.
Keynesianism is the only thing that has been historically proven to pull our nation out of recession or depression. But we are now not only not practicing Keynesianism, but Monetarism, focusing solely on the money supply.
To reduce my analysis to its simplest terms: We cannot get out of this recession until consumers start spending again. Consumers won't spend until they have jobs. The government needs to reduce the unemployment rate with a massive infrastructure investment program. Once we start investing trillions (yes, trillions) in new roads and bridges and so forth, people will start buying new cars, new appliances, new clothes, and then private industry will start hiring again because there will be demand for their products and services.
See how it works? In other words--
We need the federal government to kickstart the economy by creating jobs. That Obama hasn't done so is the major failure of his presidency, but the Republican solution is no better and is, in fact, far worse.
The path of cutting spending and tightening our belts may be very morally satisfying, but it is economic suicide. We need to increase revenue by raising taxes on the rich (the only ones who are prospering in this economy) and creating jobs for the middle class and working poor. That's the path to the light at the end of the tunnel, and we are moving away, not towards, that goal.
And none of this is "liberalism"; it's just sound economic theory.
(By the way, Canada, the Scandinavian countries, Australia, and Germany have followed Keynesianism and their economies have emerged from the global recession.)
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Posted by I’m not an intellectual
a resident of Another Pleasanton neighborhood
on Jul 18, 2011 at 2:27 pm
"GDP = C + I + G + Net Exports
But either raising taxes or cutting spending has side effects that cannot be ignored. Either one or both will make it more difficult for the economy to grow... This is true for all times and countries.
Now, what typically happens in a business-cycle recession is that, as businesses produce too many goods and start to cut back, consumption falls; and the Keynesian response is to increase government spending in order to assist the economy to start buying and spending; and the theory is that when the economy recovers you can reduce government spending as a percentage of the economy except that has not happened for a long time. Government spending just kept going up. In response to the Great Recession, government (both parties) increased spending massively. And it did have an effect. But it wasn't just the cost of the stimulus, it was the absolute size of government that increased as well.
And now massive deficits are projected for a very long time, unless we make changes. The problem is that taking away that deficit spending is going to be the reverse of the stimulus a negative stimulus if you will.
There are only two ways to grow an economy. Just two. You can increase the working-age population or you can increase productivity. That's it. No secret sauce. The key is for us to figure out how to increase productivity. Let's refer again to our equation:
GDP = C + I + G + net exports
The I in the equation is investments. That is what produces the tools and businesses that make "stuff"and buy and sell services. Increasing government spending, G, does not increase productivity. It transfers taxes taken from one sector of the economy to another, with a cost of transfer, of course. While the people who get the transfer payments and services certainly feel better off, those who pay taxes are left with less to invest in private businesses that actually increase productivity.
…If the government "dis-saves" or runs deficits, it takes away potential savings from private investments. That money has to come from somewhere. Of late, it has come from QE2, but that is going away soon. And again, let's be very clear. It is private investment that increases productivity, which allows for growth, which produces jobs. Yes, if the government takes money from one group and employs another, those are real jobs; but that is money that could have been put to use in private business investment. It is the government saying we know how to create jobs better than the taxpayers and businesses we take the taxes from.
This is not to argue against government and taxes. There are true roles for government. The discussion we must now have is how much government we want, and recognize that there are costs to large government involvement in the economy. How large a drag can government be? Let's look at a few charts…"
""The real growth in GDP has come from the U.S. government borrowing money. Without that growth in debt, we would be in what most would characterize as a depression.
This is why Paul Krugman and his fellow neo-Keynesians argue that we need larger deficits, not smaller ones. For them the issue is final aggregate consumer demand, and they believe you can stimulate that by giving people money to spend and letting future generations pay for that spending. And sine WW2 they have been right, kind of. When the U.S. has gone into a recession, the government has embarked on deficit spending and the economy has recovered. The Keynesians see cause and effect. And thus they argue we now need more "hair of the dog" to prompt the recovery, which is clearly starting to lag behind what they think of as normal growth.
But others (and I am in this camp) argue that business-cycle recessions are normal and that recoveries would come anyway, and are not caused by increased government debt and spending but by businesses adjusting and entrepreneurs creating new companies.
Let's see what Rob Arnott says about this conundrum:
"GDP is consumer spending, plus government outlays, plus gross investments, plus exports, minus imports. With the exception of exports, GDP measures spending. The problem is, GDP makes no distinction between debt-financed spending and spending that we can cover out of current income.
"Consumption is not prosperity. The credit-addicted family measures its success by how much it is able to spend, applauding any new source of credit, regardless of the family income or ability to repay. The credit-addicted family enjoys a rising "family GDP" consumption as long as they can find new lenders, and suffers a family "recession" when they prudently cut up their credit cards.
"In much the same way, the current definition of GDP causes us to ignore the fact that we are mortgaging our future to feed current consumption. Worse, like the credit-addicted family, we can consciously game our GDP and GDP growth rates our consumption and consumption growth at any levels our creditors will permit!"
- excerpts from a article written by John Mauldin
YAT, you seem to completely ignore the effects of large government and taxes in your analysis. Why is that? I would like you to read what I consider an excellent article that challenges your conclusions while providing more depth, balance, and argumentative support.
The excerpts I've provided are to peak your intellect in the hopes you read and respond to the article. What are your thoughts? thoughts.
Debt and the Deficit: Back to the Basics: Web Link
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Posted by Arnold
a resident of Another Pleasanton neighborhood
on Jul 20, 2011 at 4:52 pm
YAT: "Comparing the management of a household economy (your personal savings, debt, and spending) and the management of a national economy always leads to false conclusions.
People who say "I have to balance my household budget, why shouldn't the government balance its budget?" don't understand that a balanced budget is not always good at the national level. It's not terribly complex: just think of deficit spending and debt as a way to "kickstart" the economy."
- Considering that we have been "kick starting" the economy for several years, using several different "stimulus" mechanisms, when does the amount of leveraged debt work against us?
"What's more, infrastructure may not be "sexy" but it's what makes this country the economic growth engine that it is: our roads, bridges, waterworks, and so forth, used to be the best in the world. With investment and ingenuity, it can be again. Every time I see the Golden Gate Bridge (or even the Bay Bridge), or the Hoover Dam, I'm reminded of the great feats of which our nation IS capable--not WAS, IS."
I'm with Stacey and his "broken glass theory". Aside from that, why do you think government spending on infrastructure maintenance is a more productive use of capital than funding companies that improve efficiency and create jobs? What has the Obama stimulus package really done other than maintain job security for government employees and help to fund compensation packages that otherwise would have naturally corrected as city revenue declined, even with union interference?
The answer is nothing. Most of the that STIMULUS money (95%) went to government employee unions. Now, the feds, through the SAFER Grants, are now funding Fire Department hires up and down the state (they didn't receive anything in the original stimulus package) in an effort to maintain compensation levels for a group of employees that are overcompensated by any rationale measure. I guess my point is that the Obama/Biden stimulus money was spent on maintaining excessive compensation, which doesn't stimulate anything and actually has the opposite effect, while completely ignoring the private sector that was suffering through tremendous unemployment issues. And what happened to the all shovel-ready jobs? And since you are YAT, did the stimulus funds actually save teachers jobs and student programs, or did those funds just end up as part of the budget that helped fund teacher/administrator raises. How does that stimulate the economy? You don't have to answer that rhetorical question
Not only is this region founded on innovation but it also provides jobs that are second to none. As the article I linked stated, one of the two ways to beat a recession is though productivity gains, and spending money to maintain compensation levels of overpaid government employees isn't one of them. Allowing the private sector to Invest capital in technology that produces productivity gains is are best hope (globally, we can't come even close to competing on the cost of labor). But what are we doing? We're taxing companies to death, at least in CA, so we can fund the massive indirect and unfunded compensation costs of public employees- most of which (costs) will soon move from the footnotes to the balance sheet, and all of which are increasing rapidly even if we are fortunate enough to hold direct costs (salaries) in check.
YAT, I think you make some excellent points. Where I draw the line is when your universe of solutions ignores the obvious. When are you going to quit blaming everything on Wall Street (and they are part of the problem) and include the unions in your list of reforms? You're All In - or you aren't!
I read an article today that said one employee group earned an average of 60K per year, and police earned 100k. After reviewing both the CC Times & State Controller databases the actual compensation numbers for the PD, they were over 120K, didn't include the 41% employer/employee Calpers contribution made entirely by the city ($49,200.00), nor did it include the city paying the employee share meaning the employee compensation was adjusted up 9% for the sake of pensions, the 14 paid holidays, cash-out of sick leave, ability to buy service credits of 5 years to add to the pension, retirement healthcare fully paid after 5 years service, longevity pay, overtime paid for every non-scheduled hour worked (even if you had the entire week off except the overtime shift), etc…I wish the papers would learn how to properly report government employee compensation.
These aren't middle class perks or compensation.