alea iacta esto

All Things Bright And Beautiful

When I was younger, I would ocassionally be given one of those Watchtower publications with the pretty and pristine watercolors of man, child, woman and beast frolicking together in a corner of God’s paradise. The stench of christian felicity, love and comradeship hung heavy in the air. Given the ferocity with which Republicans fight legislation and their single-minded adherence to dogma come what may, even God may a have a problem passing a bill. From my seat, having seen how Republicans fought both the healthcare and the debt limit bills, it’s hard to see how a repub christian will sit, sup and glory hallelujah alongside his dem brother when Kingdom comes. Mystery.

It was an article of faith during the 1960s that Keynes had changed the macroeconomics debate forever in favour of government stimulus. The thrust of his General Theory is that economies in recession will not grow through fiscal balance. People need jobs to earn money to spend to keep others in jobs to earn money to spend and so on. In a recession, businesses lay people off and cut back on investment. Consumers then, unsurprisingly, cut back as they lose jobs or fear losing them. The economy contracts and enters a funk. The government remains to pick up the slack.

Trying to achieve fiscal balance in a recession to stimulate growth is just cutting off the knees to stand tall. The familiar Repub argument is that the government’s debt is too high and taxes should be cut to stimulate demand. Well it is true that the public debt is mighty tall and will reach the heavens if stacked high in 100 dollar bills. But if one presses one’s nose to a window one should at least acknowledge the view outside. America’s massive debt will never be repaid. At least not in “real”money. All of America’s debt, as well as those of all other governments, will either be repaid in vastly devalued money or written off.

The next argument is tax cuts will motivate entrepreneurs to create jobs and deliver growth. What wishful thinking! Entrepreneurs are motivated by the zing of dollars from profits or the IPO. The IPO will only happen if there is a promise of profits. Profits come from consumer spending. There’ll be no consumer spending until there are jobs and therefore there’ll be no entrepreneurial investments until jobs return. And so we have a chicken and egg situation. It’s like creation: you need that first flash. The economy needs to be jump-started either through government spending or an export boom. Just cutting taxes will increase the government deficit and if the government cuts back to counteract, aggregate demand falls and unemployment rises so you now get a downward spiral. Of course, the spiral will be checked by more spending power from tax cuts for those still lucky enough to have jobs but will this be sufficient to deliver growth? Hmmm.

Tax raises on the rich, increased government spend and some modest tax cuts for the middle and lower classes would be much more effective. The rich are already spending all they need on their essentials (ok, so a few smaller yachts, smaller grand homes etc but this is not what the economy needs). Raising taxes will reduce the fiscal deficit someway and government spend in areas like infrastructure, energy and education will stimulate and support the economy long-term. Tax cuts for the lower and middle classes will deliver extra bucks to where it’s needed most. And that’s even without enumerating incalculable benefits from the social harmony arising from reduced inequality.

Somehow money needs to be made available to the lower and middle classes who are the linchpin of the economy – it’s their spending which will spur growth. The long shot is for America to export its way out of the bog. For a 12 trillion dollar economy, as they say, it ain’t gonna be easy. But it is God’s own country and He might just work His mysterious ways.


One response

  1. Wow- I wrote a post with the same title a few weeks ago – here is my take to the famliar poem:

    August 4, 2011 at 4:04 am

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