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Economics & the Federal Budget: An Explanation

  • Tuesday, March 19, 2013

Much of what one reads or hears on television or on the radio concerning economics and that discipline’s implications for our Federal Budget is at best confusing and at worse, incorrect. My academic background was in general economic theory and monetary economics coupled with a doctoral dissertation in international monetary economics at The George Washington University. Given this background, I am regularly appalled and disappointed in the media coverage on a subject which impacts all of our lives … the Federal Budget.

We are constantly told “liberal economists” believe “X” and “conservative economists” believe “Y”. In truth, there are neither liberal nor conservative economists. What we do have are Keynes economists who basically adhere to the notion that in times of economic distress deficit spending by the Federal government should be used to “jump start” a stagnant economy and to recover from a recession.

On the other side are economists who respect the Keynes model as it explains the aggregate economy but disagree fundamentally with the premise that massive Federal debt and spending actually improves the general economic conditions in the face of an economic downturn or a recession. These economists believe Adam Smith, the original capitalist economic thinker and Nobel Prize-winning economist, Milton Friedman had it correct when suggesting the real solution is to minimize government intervention and to allow the “free market place” to re-ignite itself thereby creating jobs and economic opportunity for its citizens.

As one analyzes the results of the Keynes model, which was first implemented following the Great Depression and more recently as employed by the current Administration due to the stimulus package and other related Federal deficit spending, one finds that the results do not seem to prove this model to be correct. At least for the ten years following the beginning of the Great Depression, government deficit spending did create government jobs, but the private sector never really recovered until World War II began and more importantly in the robust period following this great conflict. Currently, we are still in a major “jobs depression” after increasing the federal debt by over $7 trillion … and growing.

On the other side of the equation, in more recent history, we find four Presidents who followed the Smith/Friedman approach — John Kennedy, Ronald Reagan, Bill Clinton and George W Bush — all four of whom reduced taxes, simplified the tax code with the net result being robust economic growth and job creation. The side benefit for all these Presidents was increased Federal revenues and under Clinton, ultimately a balanced budget at the Federal level.

There are relatively few economists from either school of thought who argue that as a Nation with $17 trillion in debt, that this is a problem which does not need to be addressed. Yet, we find even the President saying last week, our debt is not really the problem because, by his calculation, it is “sustainable.”

Some facts concerning the two budget proposals on the table at the current time might help all of us understand what is going on.

For the first time in four years and over 1,400 days, the Senate Democrat majority with support from the White House has released the broad parameters and some of the specifics of their budget proposal.

The elements are as follows:

n There are no non-defense spending cuts and no entitlement reform included.
n It proposes to raise taxes by $1.5 trillion.
n It raises total spending by over $2.1 trillion over the next decade.
n It ignores the notion that both Medicaid and Medicare are expected to double in cost by 2023.
n Finally, at the end of the next decade we will have continued increases in the Federal deficit.

The alternative plan proposed by House Republicans has the following elements:

n While spending over the next decade increases by 3.4% it reduces the rate of spending from what is currently planned by 1.6%. These are not cuts in spending for any program; just a reduction in their rate of increase.
n Consistent with the four Presidents’ approach mentioned in this article, it reforms the tax code by having only two levels of taxation for individuals of 10% and 25%. It also addresses the fact that for American corporations and small businesses to create jobs we must not be any longer the Nation which has the highest corporate tax rate in the industrialized world.
n This budget is projected to be balanced within 10 years and reduces the aggregate debt significantly.

One of the constant refrains we hear is, the middle class is stagnant and shrinking. This is just not true. In reality, Americans are living longer than ever before and for the middle class, the cost for the basics such as food, clothing, housing and utilities has dropped from 53% of our disposable income in 1950 to 32% today. What this means is while income growth with inflation adjustment has not grown significantly, the real disposable income once our basic needs are met is significantly higher than ever before. This is a trend all economists agree will continue. The actual size of the Middle Class is the same … not shrinking!

Hopefully, facts and real economic policy will drive the discussion and we can stop talking about “liberal” and/or “conservative” economists.

Lynn Mueller is a veteran Republican campaign consultant who has joined Swatzel Strategies. His bi-monthly column in the Georgetown Times focuses on economics and politics.

Opinions that appear on this page in Letters to the Editor or in columns do not necessarily reflect the opinions of this newspaper.

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