From a survey requested by my Congressional Representative:
Thinking specifically about the job situation in the country, which do you feel is the best way to create jobs and bring our economy back on solid ground?
- Additional spending on roads, bridges and other public works projects
- Cutting taxes on businesses
- Budget cuts to reduce the federal deficit
- Providing money to state and local governments to help them avoid layoffs of public employees
- All of the Above
Anyone see the problem with this question?
Productive federal spending can have a positive impact on employment and output. So can cutting taxes on business. Assistance to state and local governments, done properly (and ethically, state and local officials!) can help too.
But what impact do these three policy approaches have on federal deficits? Cutting truly wasteful public spending is a good idea, but assuming “all else equal,” each of these measures would expand the federal deficit. Thus, including “Budget cuts to reduce the federal deficit” in the “All of the Above” option renders it nonsensical, and confines the choice to one of three constituencies (four, if we include budget cutting):
- The federal government, its public works contractors, and the communities where those works are created (can you say “pork”?).
- The business sector (it’s not clear how pass through entities like S corps and partnerships, which are usually taxed on personal income schedules, would be treated vs corporations).
- State and local governments.
- Treasury debt holders, who would presumably be enriched by scarcer supply. This includes people — and many large corporations — who are holding and hoarding dollars (i.e., non-interest bearing Treasury debt).
If we’re viewing prevailing economic conditions correctly, then one through three are all sound approaches to raising employment and output — but only if they are not financed via heavier taxation! And heavier taxation does not require higher tax rates or new taxes — it can occur organically as a result of economic growth, as it did circa 2000 and 2006, when growth of federal tax revenues significantly outpaced economic growth (pdf).
Note too that the household sector isn’t even included as an option, despite the fact that it is the most damaged sector of the economy, and that the constituents on the other side of its problems — the country’s largest banks and some key financial firms — were taken care of more than a year ago. That says a little bit about policy thinking at the federal level these days. Apparently over leveraged households are not too big to fail.
We think there’s plenty of room for smart, productive public works investment. We think that lower taxes are a great idea, at least for those with income, revenue, or profits. And state and local governments could definitely use direct assistance from the federal government, which is the only sector of the economy capable of providing it right now.
We don’t advocate spending recklessly or haphazardly, and we think that the more control voters have over expenditures the better. But those who fear the “dropping money from helicopters” meme should take note that the federal government is the sole provider of money in our economy. And in an environment where households are desperately trying to repair damaged balance sheets, large corporations are hoarding cash, and demographics are shifting for the worse, it’s open to debate whether the policy dogma that has developed over the past fifty years — that monetary policy is the superior tool to fiscal policy — still holds true.
The problem is that little progress can be made until we’ve done a better job of framing fiscal deficits, debt, money, and taxes.
The private sector cannot and does not produce money. Only the federal government does (while the pocess has long been governed by the federal reserve banking system and private credit demand, the strong demand for Treasury debt, along with the Fed’s near zero overnight rate, is essentially allowing the government to spend money into existence).
Thus, as far as taxes go, the government can only take back what it has already issued. If it does not meet the private sector’s demand for money, it will cause deflationary pressures and recession (consider that in the U.S., recessions have tended to follow fiscal tightening as night follows day). The main risk of government money creation is inflation, which at the moment is only a risk — at least to us in the U.S. – insofar as import prices rise.
Once that’s understood, bipartisan possibilities begin to appear. Why not make productive government investments and lower taxes and provide assistance to state and local governments? If they have the economic effect we’d anticipate, then several positive developments would follow, e.g.: the Fed could get back to its bread and butter of managing inflation expectations; unemployment would fall; the demand for and political consternation over unemployment benefits would diminish; and tax receipts would rise, helping to “undo” some of the initial deficit spending.
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