Monday, June 28, 2010

Deficit Reduction or Jobs?

For job growth and a reinvigorated economy, demand for good and services has to go up. Demand for goods and services requires that money (or credit) be available to purchase.

If we "fight" the deficit by cutting government spending, the amount of money available to create demand will drop.

Decreased sales and income will result in lower tax revenues for the government, which increases the likelihood of more deficits.

This is the path to job losses and even higher deficits

If we concentrate on increasing the number of jobs, income goes up, demand goes up, even more jobs are created from that rising demand, and tax revenues for the government go up, decreasing the likelihood of more deficits.

This is the path to job growth and lower deficits, long erm.

So we have a choice -

1: Cut spending now, decrease demand for goods and services, causing unemployment to go up. Maybe deficits go down from the decreased spending, but maybe they go up from the decreased tax revenues.

Bottom line: decreased economic activity likely to spiral down.

2: Increase spending for a short period, increase jobs, increase demand creating more jobs, and increase tax revenues. Deficits will go up short term from the increased spending, but then deficits will go down from the increased tax revenues.

Bottom line: increased economic activity, increased jobs and an economy spiraling up.

The option: deficit cutting, is a loser; one, deficit spending, is a winner.

In our farming community (still a major part of our economy) farmers borrow money in the spring to buy seeds, plant them, and tend the crops. That's deficit spending. They harvest the crops in the fall, pay off the loans (eliminating the deficit from the prior spring) and make a profit.

No farmer borrowing - aka deficit spending - no seeds, no crops, no income, no profit for the farmer.

Can Corporations Create higher demand and more jobs in a down economy?

A corporation's first and primary duty is to make profits for its shareholders. Over the past century as corporations have become the dominant means of doing business, their pursuit of profits has led to the creation of many products of immense valu, and many joibs for our country and society.

But because of that primary goal of making profits, and because of the legal requirements for corporations, corporations do not have an obligation or duty to serve the public interest or to stimulate demand for products through hiring, that just isn't what they do.

In a slumped economy, few or no businesses are going to diminish profitability by creating jobs to increase demand - their economic self-interest counsels against taking such risk. (In its early days, Ford did this by paying workers significantly above the then current market rates - Henry Ford understood that more pay meant more workers could afford to buy his products, and that more product sold meant higher profits.)

Over the past year overall corporate profits have soared, and increased worker productivity has meant little hiring has been needed: rising private sector profits have met the economic self-interest of corporations without any significant hiring.

The job fairy is nowhere in sight, and corporations will not, for good reason, kick start hiring.

There Is Only One Possible Source for Increased Demand

There is only one possibility for increasing demand to strengthen the economy: the federal government. State and local governments are strapped for cash and many have to meet balanced budget rules, in fact they have had to cut way back on spending, under-cutting demand for goods and services and thus cutting back th need for new job creation.

By injecting money into the economy , and increasing demand for goods and services, right now the government is the only player which can prime the pumps of commerce and get demand for products flowing again.

Public sector pump priming will mean another shot of short term deficit growth, but increased economic activities will result in increased profits and increased personal income which will result in increased tax revenues. Increased tax revenues will eliminate the need for additional deficit spending for this sector of the economy, and could well lead to reduction in overall debt, as we saw in the 1990's.

Bottom Line: Either
  • cut government spending and reduce economic activity, reduce revenues, reduce jobs, and spiral into the ground
  • or increase government spending, stimulate economic activity, increase reveunes, increase jobs, and spiral towards the sky
Not a tough choice.

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