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Aug 26, 2003 There are numerous people coming out and attacking President Bush for his economic policies (or lack thereof) that have led to the current "sad state" of the American economy. Although I have an undergraduate degree in finance, I have yet to understand what policies he has specifically instituted that have led to this 'crisis'. Let's start with the obvious one, tax cuts. In theory, there is a finite supply of money to be spent every year whether that be by the government or the people. Let's say that the Bush tax cut caused $800 billion to be put in the hands of the people instead of the government as would be the case without the tax cut. What then would happen to that money in either case? In the case of the government, we could assume that the money would be spent on a variety of social programs, defense, and government employees or used to pay down the national debt (yeah right). So then, what about that money being placed in the hands of individual Americans? What would they do with the money? I suspect, they would either spend it (goods, investments, etc.) or save it (pay down debt, hold cash, etc.). So help me understand this, what is the difference on the overall economy on who spends this money? It would seem to me to be better policy for the people and business to spend it than the government. The second big criticism of the Bush policy is spending. That is, spending which contributes to the deficit. So again, it seems to me that certain amounts of government spending would be helpful to the economy because it stimulates production in the areas that it spends money on. In other words, if the Bush administration spends $100 billion on national defense, that money is going into the hands of either the businesses that make the products that contribute to that or military and other personnel that perform the services. What will those people do with that money? Spend or save it! Of course, the proper balance would be to limit the amount of spending of the federal (and state) governments to necessary services only and give the rest of the money back to the people. The goal is not to have budget surpluses but a balanced budget. Budget surpluses in government are more egregious than deficits because the government should never have more money than they need at a minimum to deliver on the services needed. Certainly, Bush has overspent but in the short term, what impact has this deficit caused for the economy? Bush could get rid of the budget deficits (in theory) tomorrow by cutting significant amounts of government programs or raising taxes. So what would raising taxes accomplish? So if you raise taxes, you will take income from the wealthy and give it to government to spend. Government will spend that on social programs (ie, welfare, medicare, etc.) or pay down the debt. Ok, so how does that help the economy? I suspect the answer is that it doesn't really help the economy as so much as it re-distributes money from the high income earners (not necessarily the 'rich') to the low income earners. So let's call higher taxes what they are, income redistribution from higher income earners to the government and lower income earners. Once again, how would this improve our economy? In my opinion, the economy of the United States right now is operating in a normal, sustainable state. The problem is perspective. In the late 1990's you had an extraordinary set of circumstances that has occured on very few occasions in US history. That is you had the perfect storm created by the need to build out the Internet infrastructure and the need to make computers Y2K compliant. These once in a lifetime events in my opinion were the sole drivers of economic growth and everything else trickled down from there. You had mandatory spending on information technology and this technology spending created significant amounts of capital to be spent on consumer goods. This spending in turn created demand and kept inventory low and production at capacity. Greenspan did a good job of making capital cheap and other than in technology services (i.e. unit labor rates) you did not see a ton of inflation. So, people had more capital and it went farther on goods. The problem with all this was it was a bubble and an unsustainable solution. It's analagous to the rabbit horse in a horse race. You simply cannot run at breakneck pace and expect to maintain that pace forever. Everything became a sprint in the late 90's and it was not sustainable. Governments adjusted their spending levels upward to keep pace with this irrational production and spending and today they have to live with it. It's like people exercising more and eating more calories to keep up with the loss in energy. Problem is, once you stop exercising you can't eat the same amount or worse yet, eat more! I am sure there are more complex models for all this and economists get paid big bucks for more technical analysis, but to me it's relatively simple. The money belongs to the people and they loan it to the government to use for the purpose of providing the basic necessities for society. The other way around is socialism and that is not American. ------------ Email Brett Keirstead: bkeirst@msn.com Comment on this column in the forum. Tell a friend about this site! ------------ |
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