Less Spending or More Revenue?

Less Spending or More Revenue?

Today the President went on TV and poured out more scare tactics and rhetoric about how our economic crisis was here before his presidency began.  In summary, it’s not his fault social security, federal pensions, Medicaid and Medicare payments or federal employee salaries can’t be paid.  He blamed fighting two wars and the previous administration for the economic conditions we have today.

His Keynesian economic policies are not to blame.  Neither did changing the “basket” of consumer goods in the Consumer Price Index to hide inflation.  Creating a wildly unpredictable business environment by waiting until December 31 of each year to pass a tax code couldn’t have had anything to do with it.  Intentionally supplanting the oil industry by not issuing drill permits to push up the cost of petroleum products didn’t put us here.  Diluting the value of the dollar through quantitative easing isn’t a problem he created either.  The problem is we don’t collect enough tax money to pay our bills – his words [paraphrased] today. 

Here are some Economics 101 principles that show where the real failures are causes of this mess are:

John Maynard Keynes was a British economist in the early part of the 20^th century.  His basic philosophy was that jobs are created as a function of spending, not as a function of the cost of labor.  In short, he believed that governments could stimulate the economy by spending lots of money.  As massive spending occurred, the economy would shift toward full employment.  It sounds good – especially if you are a liberal – but Keynes philosophy was proved wrong in the 1970s as England tried to spend its way out of a recession and unemployment increased dramatically despite the massive spending increase.  This is because the Keynesian philosophy disregards inflation as unimportant.  Prices went up and no one could pay them – hint:  anyone remember this thing called the oil embargo?

So let’s talk about inflation.  January 21, 2009 the price of a gallon of gasoline (averaged) was about $1.85.  The price of sugar traded around $350 per ton.  Today, gas is averaging about $3.62 a gallon and sugar trades around $850 per ton.  Gasoline increased almost 200% in the last two years.  Sugar increased almost 242% in the same time period.  These are basic things every one of us buys, but ironically, sugar is not part of the CPI anymore.  Why?

The government will tell you that inflation is flat.  Translation – you aren’t paying any more today than you were when this presidency started.  Go grocery shopping and you can debunk that one in minutes.  I watched as pasta increased 8% seemingly overnight.  My paycheck won’t grow at all for at least another 12 months.  I tell you, inflation is rampant and very important to everyone.

The number of people on unemployment has increased since the inception of this administration despite massive amounts – $3 Trillion – of government spending.  Is it clear yet that it is not possible to spend out of massive unemployment and recessed economies?

But spending isn’t the problem, remember?  Those rich people have lots of money so they need to pay more taxes.

Let’s talk about taxes a moment too.  A tax – any tax – is ultimately passed on to the end consumer as a price increase.  Period.  Argue that all you like, but it is true.  Shareholders of companies are not invested for charity.  They want profit – which is their income – and will not give it away to the government.  Shareholders are not exclusively rich.  Every one of us with a 401(k) owns shares of companies.  Would you be willing to give up the growth of your 401(k) account because the company you are invested in has to pay more taxes?  Of course not.  You rely upon the income from profits, so you (as an investor) want the company to increase prices to cover the loss to your income that comes from the tax.  The same thing applies to the executives that everyone likes to target as “being able to afford it.”  They aren’t going to just happily give up their income.  They will raise prices wherever possible.  If they can’t, they will move their income source (companies) to environments that cost less to do business (overseas).

In the simplest terms, the cost of living is the same for everyone at any income level.  By this I mean the basics – basic food, basic clothing and basic shelter – are the same for someone making $30,000 per year or $100,000 per year.  The difference is that as income individual increases, those with higher income have the ability to choose something past the most basic options.  They buy more or better because they can. 

However, in economic comparisons, the term “all things equal” is applied and applies in this example.  If the basic cost of living is $20,000 the person making $30,000 and the person making $100,000 can both afford to live.  As prices inflate, the person making $30,000 cannot sustain the same amount of increase that the person making $100,000 can.  If you add together inflation – the 242% increase in sugar prices – and a tax increase of any kind, the only person who gets hurt is the guy making $30,000 – the little guy.

To get to the point – Speaker Boehner walked out of the White House today and said he will no longer negotiate with the President.  His reason is after a deal was almost complete, our president – very same who is threatening not to pay seniors, soldiers, the disabled or government workers next week – wanted more taxes. 

The GOP says no to taxes and cut spending.  They get branded as uncooperative and out to protect the rich.  The Democrats say spending is not the issue, that cuts will undo the last half century of social progress, and drag us back to pre-Eisenhower days – so the rich need to pay more in taxes.  I beg someone!  Please explain to me who is going to be helped by a tax increase on anyone or anything, and just who is standing up for the little guy.