Skip to comments.Are Budget Cuts Or Tax Hikes Better For The Economy?
Posted on 11/21/2012 6:53:21 AM PST by SeekAndFind
Should debt-ridden and economically struggling Western governments be doing everything possible to reduce their deficits?
Those in favor of immediate deficit-reduction argue that it is a necessary precondition of economic growth. Today's deficits become tomorrow's debt, they say, and too much debt can bring fiscal crises, including government defaults.
Markets, worried about solvency, will require high interest rates on government bonds, making it more costly for countries to service their debts. Defaults could cause banks holding government bonds to collapse, possibly leading to another financial meltdown. There can be no sustained growth, say the deficit hawks, unless we start balancing our books.
Their opponents agree that we should eventually rein in deficits but right now, when economies worldwide are weak, is the wrong time. To shrink a deficit, this argument goes, you need to raise taxes or cut spending. Taking either of those steps reduces aggregate demand, making an already faltering economy sputter and sink into serious recession. The all-important debt-to-GDP ratio swells because GDP growth slows more than the measures taken reduce debt. Therefore the approach is self-defeating.
Governments should instead continue to run deficits and paper them over with borrowed money, waiting to balance their budgets until economies get stronger.
The deficit debate is often misleading, however, because it tends to ignore a huge difference between the two kinds of deficit reduction. The evidence speaks loud and clear: When governments reduce deficits by raising taxes, they are indeed likely to witness deep, prolonged recessions. But when governments attack deficits by cutting spending, the results are very different.
(Excerpt) Read more at news.investors.com ...
1. Increase Spending, Increase Taxes
2. Increase Spending, Lower Taxes
3. Decrease Spending, Increase Taxes
4. Decrease Spending, Lower Taxes
Democrats REALLY want #1, but can't do it with this current Congress.
Republicans REALLY want #4 but can't do it with this Senate and President.
That leaves us with $2 or #3. I think the end result would be a compromise -- #3.
But I am willing to bet the END RESULT will be #1 anyway.
Reagan and Papa Bush both agreed to packages similar to #3. The end result was they both got taken for a ride. SPENDING NEVER DECREASED and all we had left was Papa Bush breaking his "Read my lips" pledge.
There’s another, very scary option. Massive borrowing followed by massive inflation producing vastly cheaper dollars to repay the loans. Prices soar, savings and some/most investments are destroyed and huge numbers of people become even more dependent upon government; a democrats dream.
It’s not possible to extract significantly more tax revenue from the US economy.
Cutting spending will actually decrease tax revenue.
But, cutting spending significantly is absolutely necessary, lest we replay the Weimar Republic.
There is no way out of this that does not involve much unpleasantness.
The best we can hope for at this point is a decade of economic agony.
Later just never seems to arrive.
I find it interesting that the answer for a government and for an individual, when given by the same liberal person, are exact opposites.
They say people should live within their means, but not the government.
Economic illiteracy must be a prerequisite for liberals.
The MSM and the general public don't understand the multiplier effect, nor do they grasp the concepts behind the Laffer Curve. If they did, the public would be screaming for reduced spending and tax cuts. Both will actually growth the system faster.
No, some people (darned near half the country, as it has come to pass) do not want to prosper from the sweat of their own brow, they want to prosper from the sweat of someone else's brow, courtesy of government gunbarrels.
What we need is to cut GOVERNMENT.
Interesting analysis, but you did not mention one thing: the people you take the money from are different from the people that get the government spending.
Too many people now want “Obama money”, and don’t care where it comes from.
Easy: CUT SPENDING ... NOW.
This is not a bad thing. Those corrections are LONG overdue.
We'll be stronger and the currency worth something again if we cut the size and scope of the FedGov. And we need to do it drastically and NOW.
The sad thing is that it does take money from the productive sector and gives it to the non-productive sector. Even worse, it passes through the gov’t hands in the process, sucking even more away.