Tuesday, September 13, 2011

Economy vs. Deficit and Economists vs. Republicans

Good morning, friends, viewers, and casual passers-by.
Last night was the CNN Tea Party debate. For those of you who may not know, the Tea Party is a particularly conservative branch of the Republican Party - the conservative party of the two most prominent parties in the US - which adamantly opposes taxation and government oversight. They perpetuate the idea that the government is over-spending and over-regulating and needs to be reined in and reduced to its purely Constitutional responsibilities. The legislation most opposed by the Tea Party is the Patient Protection and Affordable Care Act, also called "Obamacare," which was signed into law on March 23, 2011; to them, it is the prime example of government overstepping its boundaries and recklessly spending taxpayer dollars.
The focus of the debate last night was once again the economy; there was a lot of raucous applause and booing for the candidates on various points, but what got to me was the misrepresentation of facts, especially about the economy and the debt.
You see, what the candidates failed to note was that the "economy," the "deficit," and the "debt" are all different things. The "economy" is commerce. Business. Consumer spending. This is where citizens are employed and businesses produce goods and services to be consumed by the general public. The "deficit" is the amount of money in one fiscal year that the government spends in excess of its revenue (meaning income from taxes.) The "debt," finally, is all of the money that the government still owes, taking into account all of the deficits over the years that have not yet been paid off.
This difference may not seem like much of an issue to some voters, especially because they are all admittedly things on the "to-fix" list. The issue, however, is that they cannot all be fixed at the same time.
Economists and business leaders alike say that the way to get commerce moving again is to increase consumer spending. The basic idea is that the reason that businesses produce goods and services is for those goods and services to be purchased. Businesses cannot (and should not be asked to) hire employees if the current employees are providing adequate supply in relation to the demand of the company's clientele. In order to increase production, or supply, one must increase demand. If demand increases, then the companies will probably hire more employees to fill the need.
The issue with this is that, by the free market, no one wants to take the first step. Consumers do not want to take on more debt in hard economic times; they are already strapped for cash and worried about whether they will have a job in the morning. Businesses do not want to hire new people; with fewer products being purchased, they too are strapped for cash and worried about whether they will have customers in the morning. The only entity with a big enough influence (to the tune of hundreds of billions of dollars) is the government, which has the added benefit of being able to look at the problem with a largely unbiased (or at least bi-partisan) opinion and with the focus on improving the lives of its citizens over the shares of its stockholders.
Now I know that sounds scary--when everyone has debt, the last thing they want to hear is that the government has debt as well, and there has been a lot of fear-mongering about whether the government has the right to do so and whether it will pay off.
To this end, all of the economists I have read have agreed that government spending is the only way to improve the economy. Furthermore, they worry that the proposed stimulus plans are not big enough. The 2009 plan, approximately $787 billion, did actually have some effect; unfortunately, the results are hard to quantify because the economy just ended up not sucking quite as badly as it could have without the stimulus. This, however, is not a policy failure, except insofar as it should have been bigger to get the economy going. The problem is that because it didn't improve, naysayers don't want to give Obama even more money now for a new stimulus, which economists again say probably isn't big enough.
But on to the debt and deficit. Surely we have a lot of both. Congress has been asked to come up with a budget plan to avoid flirting with default again by reducing government spending by over $1 trillion over the next ten years. At the same time, many are calling for a tax overhaul to close up loopholes and hold everyone accountable for their fair share of taxes. Both of these things are probably a good idea - if we reduce spending and increase revenue (income from taxes), we will have a much more balanced budget with a lower deficit.
Because of the Republican candidates' failure to separate the economy from the deficit in discussion, they are essentially spreading misinformation. They seem to say that government spending increases the deficit, which will make the economy worse. Paying it off, however, will make the economy better. This is simply not true. Nothing about the government paying off its own debt will increase the production or consumption of goods and services. Furthermore, if the government continues not to act on the economy, businesses and households will continue to lose their own revenue; as a result, tax revenue to the government, which is based on percentages of such commercial exchanges, will fall at precisely the same rate. This will cause its own increases in the government deficit and debt.
In contrast, short-term government spending could reverse the whole cycle. By spurring the economy, the government increases the GDP, which increases tax revenue, even without doing anything to taxes. This will reduce the deficit in its own way, meanwhile making life much easier for citizens, as employment rates will go up to fill the new-found demand. Thus, a short-term stimulus can quickly pay for itself, while a long-term policy of austerity will result in an increase of deficit over time.
This is what economists are saying. Meanwhile, candidates insist that spending will not improve anything. How can they reject the advice of experts, you may ask?
It is just one of many things that speaks to a deeper problem among the conservative movement: an ignorance of reality in favor of an idealized world that follows a near-religious set of dogmas. I could go on, but Andrew Sullivan said it much better than I ever could and I would recommend that anyone read it for basically my full opinion on the matter.
So please leave your comments! I am not sure if I will be able to reply to them (there is just not a good way to reply to comments here on Blogger), but I do want to know your thoughts because I'm more than willing to admit if and when I am wrong. The only way we can fix these issues is by having civil and honest discussions about the problems with our nation.