Cut The Deficit?

Cut The Deficits?

An overwhelming majority of small businessmen polled in northern New York, said that their greatest concern was the government's growing deficit. They said the government needed to cut expenditures, not increase them. It should also (somehow, not specified) encourage business. Analogies were drawn between a household and the government; one couldn't live beyond one's means as a family; nor could government, they insisted.

It's as if Keynes never existed!

A healthy portion of the deficit is from automatic stabilizers, like payouts for unemployment; the more unemployed, the more payments. Two benefits flow from this: people are not thrown into utter misery, and they still buy things, thereby sustaining some demand for goods and services. Without unemployment insurance, food stamps and other support payments, the Great Recession could easily have become the Second Great Depression.

How do you stimulate business when there is too little demand in the economy for whatever reason--in this case because of financial collapse? Do you cut government expenditures?

How, logically, would this help? If consumers aren't buying and businesses aren't selling--or buying materials, etc., how does cutting government expenditures solve this problem? Doesn't it make more sense that if government bought things (highway paving, bridge materials, labor), it might stimulate business, even if it meant a short-term increase in the government deficit?

Governments are not households; that's a false analogy. Households can't create money, or destroy it; governments can and do. Furthermore, if one household saves money, it is being thrifty, but if everyone saves money, if nobody spends, everyone becomes poorer. This is called 'the paradox of thrift.' It's what happened in Japan for the Lost (two) Decade(s): savings rates were too high. Business floundered.

It could happen in the US, and will, if there is no further stimulus and real jobs bill, or, if the only growth in the national budget is for "Defense." Defense spending is a poor stimulus. Not only does it use large amounts of capital for each job, it spends much of it abroad--"stimulating" Okinawa, for example, or Afghanistan. Also, it doesn't make the nation more productive, except at killing.

And yet, no politician would dare suggest cuts to "defense," the largest discretionary item in the budget.

Obama pretends he's listening: he's cutting discretionary spending in about 1/8 of government--for 2011--and yet he knows that what the nation needs is more stimulus. The government should spend more, not less, until we're in a solid recovery and unemployment is steadily receding. If there were no more stimulus to promote business, or prevent state and local government lay offs, then demand would fall and we'd be right back where we started: it's called a "double-dip" recession. That happened in 1937, and in the Third Century.

In Rome, that double-dip went on for hundreds of years.