What is it About Economics…The Debt Deal Examined

via Google Images

Government spending is out of control.  The national debt is almost equal to GDP (97%).  Unemployment is at 9.6% officially, almost 20% unofficially.  The debt ceiling game in Washington leaves little room for comfort among middle class Americans and investors.  A U.S. credit downgrade is imminent.  The future is not bright.  So what is it about economics that leaves so many people (on many occasions myself included) confused and bewildered into a state of apathy?  After all, are we not taught the fundamental aspects of economics, namely that competition preserves ingenuity, the law of demand determines fair (market) prices, and that a market free of government encourages investment for future growth because the market is the amalgamation of millions of choices – for America approximately 311 million.  So long as these phenomena are allowed to occur unimpeded, the path toward prosperity continues.  As more jobs are created and more products enter new markets, economic growth occurs both vertically (established markets grow) and horizontally (new markets emerge). The net result is a forward-moving economy and a growing people. So how is it the average American has ended up in the ditch, given only the choice to take the hand to his Left or Right?  The Cato Institute’s Daniel Mitchell discusses just how Keynesian economics has contributed to the growing bewilderment surrounding economic analysis, namely the misdirected attention given to GDP as a measure of the health of an economy.  He engages in useful analogy, using the finances of an individual home in place of an entire economy.  In economics, models are often used to simplify economic variables, rendering understanding of the fundamental more prevalent.  Mitchell has done this beautifully.  He demonstrates two key points contrary to the Keynesian solution.  

  1. Government expenditure crowds out the private sector.  That is, as government spends more, less is left for private consumption and investment, the driving forces for economic growth.
  2. As taxes increase, spending (as measured by GDP) stays the same, while less expenditures are free for things that improve our lives because more of our total income (fixed in the analogy) is redistributed as a tax expenditure.

Mitchell’s message is this: “government is capable of redistributing how national income is spent, but it isn’t a vehicle for increasing national income.”  The wealth of a nation is not determined, nor can it be significantly increased, by government spending (as shown in GDP).  Rather, wealth is determined by gross national income (GNI).  While GDP reflects higher levels of spending, an actual increase in GDP is only a product of increased national income. This point is particularly important given the debt deal just passed by the House.  It incorporates “enforcement mechanisms” built into what I would call a debt deal that pays only lip service to the people.  Besides the fact that the deal only trims a “projected” $1 trillion from the national debt over the next ten years (this is paltry and means very little), President Obama rejected any proposals that would enact cuts from entitlements after 2013.  Here is a passage from the White House fact sheet:

“In Securing this Bipartisan Deal, the President Rejected Proposals that Would Have Placed the Sole Burden of Deficit Reduction on Low-Income or Middle-Class Families: The President stood firmly against proposals that would have placed the sole burden of deficit reduction on lower-income and middle-class families. This includes not only proposals in the House Republican Budget that would have undermined the core commitments of Medicare to our seniors and forced tens of millions of low-income Americans to go without health insurance, but also enforcement mechanisms that would have forced automatic cuts to low-income programs. The enforcement mechanism in the deal exempts Social Security, Medicaid, Medicare benefits, unemployment insurance, programs for low-income families, and civilian and military retirement.”

via Google Images

Although tax-reform is on the agenda upon the expiration of the Bush tax cuts at the end of 2012, which according to the President would require higher earners to help pay for deficit reductions, the reality of exempting entitlements entirely will necessitate either higher taxes for everyone or continued growth in the debt.  Moreover, although the debt deal reduces the rate of spending, discretionary spending still projects upward over the next ten years.  Consequently, the debt deal will most likely result in higher taxation and less disposable income for the people – an additional and significant detractor from economic recovery.  In short, it is my contention that the deal does nothing for the long-term financial solvency of the U.S. government and will result in tax increases and spending allocations that will surely out pace our weak recovery, leaving less for private consumption and investment. Despite often conflicting ideologies regarding issues such as entitlement spending, foreign wars, and tax reform, our dual-party system hardly represents differing views when it comes to economics, namely spending.  That is, they both prescribe to a school of economic thought that has led America to where we now kneel.  Whether you have heard of Keynesian economics or not, you have felt its impact via stagnant wages, lost jobs, and growing government.  The new debt deal only reinforces this. While typically associated with the Left, Keynesian economics, whether in the name of stimulus, tax reform, or entitlements, promotes government expenditure at the expense of the private sector, stifling growth and rendering competition, demand, and the free-market mute.  These trends have grown beneath both parties in recent decades.  Consequently, more spending for entitlements and foreign wars is rendering the welfare-warfare state an increasingly stark reality.

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About Jeremiah Dow
I have a B.S. in Politics, Philosophy, and Economics with a minor in Economics. I finished school in 2010 and am currently working on independent research in various areas including political and economic philosophy, government, and history. I am also currently looking for work in research, particularly the social sciences dealing with public policy work. I aspire to a top-level graduate institution, but would first prefer some professional research experience. Some of my primary influences are Ayn Rand, Noam Chomsky, and Howard Zinn among others.

5 Responses to What is it About Economics…The Debt Deal Examined

  1. Pingback: Raising Debt Ceiling Overlooks Costs, Undermines Future « kapitalcon

  2. Pingback: S&P Donwgrades U.S. Credit Rating to AA+ Amidst Shambled Debt Deal « kapitalcon

  3. Pingback: Congress and President Ignore Warning from S&P, Pass Meanningless Debt Package Anyway « kapitalcon

  4. Pingback: The Financial Crisis, Foreseeable and Preventable « kapitalcon

  5. Jeremiah Dow says:

    Reblogged this on kapitalcon and commented:

    Given that it’s debt talk time in Washington, I thought I would repost my discussion from 2011. Given that Washington is still behaving the same, my discussion – with the exception of statistics cited – is still relevant. Indeed, after last year’s credit rating downgrade of the U.S. and the Federal Reserve’s continued spending, the debt ceiling issue should be in the forefront of everyone’s mind.

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