I’ll Promise You A Rose Garden…

You have all heard the campaign ads… “I promise to reform [fill-in the blank: Medicare, Social Security or welfare]” or “I promise to balance the budget without raising taxes”

The question you should be asking is “how?” What are they going to cut? What are they going to change? And you should also realize that for every act there is a reaction. Ask yourself, what will the consequences of cutting the budget? What will a smaller federal budget mean? Will one of the trickle down effects be more local taxes or classrooms with maybe there will 30 – 35 students per classroom instead of 20 students per classroom. Will it mean cutting the fire department and police force? Will it mean that the bridge that is crumbling will not get fixed? It definitely will mean higher unemployment.

Last week I wrote about the statement that President Obama made about the economy that the Republicans jumped all over, how the rise in unemployment is due to the rise in state and local government layoffs. The gains in the private sector were offset by the losses in the public sector.

I believe that the budget has to be balanced in the long run, but I disagree with the Republicans on how. I believe that we have to raise taxes on the rich and super rich. I believe that we have to use the budget ax very carefully. For example, we need to spend money to fix our infrastructure and we need to take the cap off of Social Security. Right now cap to contributions to Social Security is $110,000, if you make under $110,000 you pay 4.2% of your income, but if you make $1,000,000 you pay only 0.4% and if you make $10,000,000 it is only 0.04%. That limit should be taken off and also there should be a limit to how much you collected from Social Security based on your income. Someone who has a retirement income of $50,000 or more should have their Social Security benefits cut.

There is a theory that I subscribe to, Keynesian Economic Theory, which is called commonly “Priming the Pump.”

In particular, he concluded that classical economics rested on a fundamental error. It assumed, mistakenly, that the balance between supply and demand would ensure full employment. On the contrary, in Keynes's view, the economy was chronically unstable and subject to fluctuations, and supply and demand could well balance out at an equilibrium that did not deliver full employment. The reasons were inadequate investment and over-saving, both rooted in the psychology of uncertainty.

The solution to this conundrum was seemingly simple: Replace the missing private investment with public investment, financed by deliberate deficits. The government would borrow money to spend on such things as public works; and that deficit spending, in turn, would create jobs and increase purchasing power. Striving to balance the government's budget during a slump would make things worse, not better. In order to make his argument, Keynes deployed a range of new tools—standardized national income accounting (which led to the basic concept of gross national product), the concept of aggregate demand, and the multiplier (people receiving government money for public-works jobs will spend money, which will create new jobs). Keynes's analysis laid the basis for the field of macroeconomics, which treats the economy as a whole and focuses on government's use of fiscal policy—spending, deficits, and tax. These tools could be used to manage aggregate demand and thus ensure full employment. As a corollary, the government would cut back its spending during times of recovery and expansion. (From PBS)

As I wrote that this doesn’t mean that we cannot balance the budget, what it means is that we cannot do it by just cuts, that we also need to increase taxes. We need to spend in some areas to stimulate the economy and cut the waste in the budget. We need to protect our “safety nets” and not cut programs such as head start and prenatal care and that we need to tax those who can afford it, the billionaires and millionaires. It the middle class that supports the economy and their disposable income.

Tomorrow, part 2 where I will look at how austerity programs worked in other countries around the world.