Sunday, July 31, 2011

False economy

Something to bear in mind:

Many who say we need to cut the deficit now are saying we need to because it's too big, and it's better to cut now than have to pay even more later.

Here's a thought though: the likely result of cuts is that the economy will weaken. Now, this immediately creates a problem in that fiscal revenues will drop, and so the deficit isn't going to drop by anything significant. Worse still, in practical terms, it'll become much more difficult to pay off, for the same reason that it's easier to pay a $100,000 mortgage if you have a $75,000/year job, than a $10,000 credit card debt if you don't.

But leave that aside from now. If the economy, as seems all but certain, contracts as a result of cuts in short term spending, what's the next step in terms of what government will do? Will it cut spending even more, with unemployment continuing to get worse?

No, eventually - whether that's in 2012, 2016, or 2020 - will realize it has to spend more to stimulate the economy. And because the economy will, by that point, be considerably worse than it is now, the size of the stimulus the government will inevitably have to provide will be much, much, larger than what it'd need to pay now.

Now if you want you can tell me "Squiggie, stimuli don't work, look at the last one" but frankly, aside from being wrong (we didn't, over-all, actually have a stimulus - the totality of government jobs actually decreased by HALF A MILLION during the last two years), the reality is that a larger stimulus, that's actually in line with what economists were calling for originally is inevitable if the economy doesn't improve. Do you really want to bet, with no serious efforts being made towards job creation in the current government, with likely lower incomes for the retired, government workers (those that remain), and the unemployed, that some how unemployment's going to make drastic drops any time soon?

Making cuts now doesn't make the deficit smaller, except in the very short term. In the medium term, cuts now will result in deficits that make this one look like my credit card bill.

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