Posts Tagged ‘spending’

The Present Debt Crisis

Wednesday, July 27th, 2011

When I was in business, I used to have a cartoon I would post in the office from time to time. It showed an anguished face, literally pulling his hair out, and was captioned “Oh no, you did just what I told you to do”. The point, of course, was the folly of putting together a solution before defining the problem.

In today’s government debt “crisis”, the parties seem to suffer from the same affliction. What problem is this “crisis” supposed to solve? The media says we are trying to avoid default, but that is silly. We should all understand that it would be difficult to default on existing debt unless done so willfully. Government commitments could not be met, but the debt part of it is fairly easy. So what is going on?

Simply put, the problem to be solved is “What portion of GDP should the federal government spend?”. The President seems to want 25%, the House Republicans 18%. Historic tax income has broadly been in the 18 to 19% of GDP range. So how do you spend 25%? Raise more tax revenue. The President’s prescription for this is to tax “wealthy” people at a higher rate, and thus bring an increased percent of GDP into federal coffers. The opposition says that this will not raise more revenues, as people will avoid paying more tax at the cost of economic activity and jobs. Their argument is that if economic activity slows due to rate increases tax revenues will go down, not up. The President says this is not the case, that economic activity will continue regardless of changes in the tax rate.

So draw your own conclusions. But do so in the context of the actual problem being discussed – not all the silliness you see on TV and in the papers these days. What portion of GDP should the federal government spend?

Jim Hirshfield