Sunday, October 14, 2007

Bush Economics

The idea of the laffer curve talking hold in reality is probably true. But it entirely depends on the taxable revenue generated by firms. The idea behind the laffer curve is that a cut in taxes, spurs growth, and that the resulting substantial revenue is taxed. His curve shows that there is an optimal point of taxation. For example, 0 percent taxation leads to no government revenue, and 100 percent taxation leads to none.

The problem with Republican economics is that the laffer curve is often used as an excuse to cut taxes...and they usually do it too much. Their optimum point always leads to deficits.

This is highlighted by Bush's attempt to make tax-cuts permanent(by tax-cuts I also mean the elimination of some taxes altogether), a ridiculously unsound and risky policy. This would in effect make the optimal point of taxation constant and permanent, unadjustable, and too reliant on the health of firms, whose profitability is likely to oscillate over time. Must our social services also be put in jeopardy through reliance on big banks?

If the expected substantial growth spurred by tax cuts dips at all, then an unbalanced and inflexible tax policy puts the entire government in jeopardy. This is no exaggeration. The U.S. Treasury is about to auction off more bonds, the first time since 2003, because the credit crunch has lowered taxable income. The increase in outstanding bonds is not small either, the expected number is that it will increase 50 percent. Being so dependent on firms means we place our own government in jeopardy - when they get in trouble, we need to issue more debt, and if it gets worse, sales of bonds will increase again.

An economic slowdown should not mean a large social service slowdown, and if we didn't issue more debt, this would certainly occur. But we can't keep issuing more debt, because as any 1st grader knows, debt is bad.

While the government and social services are always dependent to a degree of our President's choosing, the degree to which a more substantial economic slowdown than the most recent one will harm the economy is compounded by the fact that a working deficit would balloon during such a time. Bailouts are less likely. There would be major repercussions across our social services infrastructure. Bush's mindless cutting of taxes(I bet he would have 0% taxes if he could, not realizing it would mean no government), and unsound economic policy, is a threat to our future. I echo Greenspan's comments in his new book on the matter.

We are predicted to be the only generation in American history who will have less money than our parents. This is not because of competition from abroad; free trade and competition is better for everybody without fail on a macroeconomic level. Rather, our growth rates are predicted to slow in the coming scores due to...government debts and deficit.

To put this in perspective. When Bush arrived in office the National Deficit was 5 trillion. Today, it is over 9 trillion dollars. Congress just raised the deficit level to something above that. If they didn't, the US Treasury would have to default on all its loans, for the first time in its history. In order to pay back our loans on time, we needed to borrow more. The congressional increase in the deficit limit occurred only one month ago because of the credit crunch. At the end of the fiscal year, there were not enough revenues as expected by Bush's economic plan and optimal taxation...which we all know is now rooted in faith, not reason....self-interest, not well-being.

Back to us having less money than our parents. The US government debt is proportional to its deficit. Every year we are in the hole, we are adding that to our deficit. The debt level is increasing(indicated by the sale of the Treasury bonds) and, as measured relative to yearly GDP, is on track to surpass it, especially when Social Security and Medicaid begin to pay for the babyboomers. These are conditions for default. This situation was also the topic of the book "The Generational Storm" by an MIT Economist. The risk of material default of the government...and major adverse consequences, spurred by a major economic slowdown, is becoming more and more likely.

We will have less money than our parents because of these massive deficits, again 9 trillion in all, a 100% increase since 2003. Under the conventional view, ongoing budget deficits decrease national saving, which reduces domestic investment and increases borrowing from abroad. This has already happened under Bush. Interest rates play a key role in how the economy adjusts. The reduction in national saving raises domestic interest rates, which dampens investment and attracts capital from abroad. This results in a loss of confidence as well, so the theory goes. It also throw our GDP to the shitter. Simply, GDP would be bigger in the future if there were no budget deficits now.

I wish I could sit Bush down and explain to him what he has done. What the hell happened to these people, do they not have souls, empathy, and the ability to think? How could this of happened?

1 Comments:

Blogger Scantron said...

I'd also be interested to hear from an informed source how important it is, more or less, that we have so much debt tied up in China.

12:54 AM  

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