GDP Growth Is Critical For Deficit Reduction, And Requires Spending And Taxes

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In deficit reduction talks over the past several weeks Congress and the President have been debating spending cuts and tax hikes.  However these two deficit “bandages” merely echo the symptoms of a weak economy; they do not address the root cause of the deficit and debt.  The true requirement to bring about deficit reduction and debt reduction as well as the only way to create substantial job growth is to initiate strong and sustained growth in the nation’s GDP.

The Gross Domestic Product drives the deficit and in turn the debtPeriod.

When the GDP is in decline, the government must become a more significant spender within the economy; it is the only way to prevent a continued economic spiral downward.  However, since the GDP is lower, tax revenues are also correspondingly lower.  Both these effects create a double drain on the national coffers.

Without a strong growth in GDP, everything stagnates.  It is human nature to expect an increase in return over time, and without the growth of GDP, the people still expect that their return to come from somewhere.  Unfortunately in a Democratic Republic, politicians often trade short term gains for long term catastrophe and attempt to appease their electorate.  They unsuccessfully try to create an expected return by cutting much-needed spending and reducing vital tax revenues. A tax cut on income that is not used to infuse economic growth only adds to the government’s decreased revenue problem.  Thus, while tax cuts on the low and middle class incomes help the economy, tax cuts on wealthy incomes have little effect as such tax relief income usually does not flow back into the economy.

Spending cuts will not help our nation out of our economic malaise, and most likely will only worsen the situation.  All such measures do is add to the unemployment rate and reduce cash flow that could otherwise be used to create a faster economic recovery.  A critical factor in the resurgent rise in the unemployment rate over the past few months has been the GOP agenda on the national, state and local levels to cut vital government jobs, despite their necessity.  It has been estimated that the GOP’s spending cut proposals could cost the nation up to another 700,000 jobs, possibly more, further increasing the number of applicants per open position and making the finding of a job even more difficult.

The American Recovery and Reinvestment Act of 2009 (a.k.a. the stimulus bill) saved or created up to as many as 3.3 million jobs as of August 2010, according to the CBO.  With such a number, it would appear that government spending is a crucial component in helping to create stability in a failing economy.  The problem with the ARRA was not that it had too much spending as Republicans claim, but rather that it had too little.  More targeted spending is needed to go from stabilizing the economy to rebuilding the economy. Compare this to the GOP promise of job growth from the December 2010 two-year extension of the Bush-era tax cuts on the wealthy.  Corporate profits have rebounded significantly over the past 18 months, with some companies reporting record profits. But the tax savings which the corporations and wealthy have continued to enjoy have yet to translate into job growth despite such a promise from the Republican leadership.  In addition, despite all rationality to the contrary, subsidies to companies making record profits are still intact and are likely to remain so, even as those same companies continue to cut jobs in the United States only to relocate them elsewhere.

The bottom line is that a company is not going to create nationwide economic growth just for the sake of it; a company is only motivated by profit and its own “personal” economic growth.  Since most wealth is now made through investments, rather than through manufacturing or providing a service to a job-holding customer base, companies see little need to create job growth in the United States or to invest in the economy until the GDP rebounds. And the GDP will not rebound until there is significant investment in the economy…a Catch 22. The only viable solution to lower the long-term deficit is to grow the GDP, and the best way to do this is for the government to increase spending targeted at initiatives designed to encourage job growth within the private sector.

Unfortunately, because the nation squandered its chance to reduce its deficit and debt when it had a prosperous economy, it does not now have the option, as is the historic norm, of allowing the deficit to increase during the stagnant economy.  To help spark growth in the GDP tax revenues must be increased on those who can afford it. With an ever increasing number of Americans living from paycheck to paycheck, and with fewer Americans holding more of the wealth, simple economics and mathematics, not to mention the basic rights owed to all individuals belonging to our society require it. And besides, unless the GDP makes a full recovery, no realistic level of spending cuts and/or tax hikes will wipe out the deficit, let alone even begin to lower the national debt.

–Raymond Gellner, National Liberal Examiner,     |   Twitter 

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