Wacky Claims, Hopeless Ideas, and Real Solutions

It seems like there is a lot in the news lately claiming different solutions on how to get out of this mess. Paul Krugman wants you to believe that the government should double their spending. Nancy Pelosi thinks that a massive increase in government jobs will reduce the deficit. For the most part, I disagree with both. First of all, government jobs won't do anything but add to the deficit, but adding them to the current government structure most likely wouldn't help economic issues at all. Assuming we can double our spending, and that it wouldn't be reckless, completely ignores how we got here.


It's odd, because these people, far more educated than myself, seem to want to use their skewed concept of history to say, here is an economic crisis, this is what we should do. This economic slump is due to people not spending, but it's not due to lack of money in the system. The argument from the left on revenues claimed that businesses were sitting on money. That the problem was people weren't supplying, because others weren't buying. So if people aren't buying, how is racking up another couple of trillion dollars a year going to fix anything?


So how did it start? The banks crumbled as a result of massive amounts of government backed, irresponsible loans. Many claim it had nothing to do with Clinton's push for affordable housing. They blame Bush and ignore attempts to squash it before everything went South. None of that really matters now, but for years banks were loaning to anyone with a desire for a new home. Everyone could get approved for homes they couldn't possibly afford. The banks could do this because Fannie Mae would buy those mortgages from them, it was nearly instant profits. As a result of this, housing prices skyrocketed. Neighborhoods were popping up at record rates. Toss into that out of control credit cards, enabling people to entertain lifestyles beyond their means, and you've got a ticking time bomb for the economy. The fact is, credit was handed out too easy, the value of housing and products were abnormally high, then one day the credit bubble burst.


So how do we get out? First, at some point people are going to start spending again. I would actually bet this happens soon. It won't be what it was before. Even if that credit is still available, the culture has now changed. Most likely we'll see the economy grow at a more healthy level, regardless of government intervention. When that happens companies will start producing, and jobs will be created.


What can the government do? In the Republican plan for job growth they call for tax reform. They want a maximum of 25% tax on anyone's income. While at first this looks like a tax cut for the wealthy. The truly wealthy pay 17.9% due to tax loopholes, throw in some lobbyists and you get the prime percentages granted to GE. So closing loopholes would increase the overall percentage to the super wealthy, while lowering it to smaller businesses that were paying the higher rates. It would also clean up the tax code, reducing the government burden to the businesses who's rates would rise.


It would also increase the amount a person actually sees on their paycheck. This additional income would either go to paying off individual debt, or add to an increase in spending. Either way, the economy ends up improving.


So why is the deficit/debt so dangerous? First of all, we have to pay it back eventually, but as the debt to countries like China grows, our power decreases. If you happened to have read my link attached to Pelosi's name, you read how important the subject of trade with China is, and continuing to give them the upper hand, will make it more and more difficult to get out from under their wing. Second, once we finally reign in spending we will have to pay down the debt. Even when Clinton had a budget surplus, it only stalled the growth of debt, it didn't do much to shrink it. As our debt grows, so do our payments, and those payments represent money that could be spent elsewhere. Money that could be helpful down the road. So, not only will increasing spending do very little right now, it will hurt us a lot later. We should be looking for reform, so we can maintain, while reducing spending.


It's not quite time to build, it's prime time to prepare for building, and preparation now will result in better growth for the future.