Scott versus Scott

Welcome to our blog. Here we will debate the days most serious topics and allow users the chance to discuss the topics as well. The range of topics will vary, but one thing will remain certain, the debate will rage on. Scott Lesinski is a proud conservative and Scott Jones is a proud liberal. However, the roles will switch on some topics. Stay tuned.

Scott Lesinski is currently an actuarial associate for a large human resources and insurance consulting firm in Saint Louis. He is also an avid student of US history and enjoys following current events, with an eye to their contextual relationship to the past. He is also, in fact, a former student of Mr. Scott Jones. Scott is working toward his FSA credentials, which is akin to earning a PHD in Actuarial Science.

Scott Jones is currently a high school social studies teacher at a high school in suburban St. Louis, MO. He teaches World History, AP American Government and Senior American Foreign Policy. He has a BS. Ed. (Secondary Social Studies) from the University of Missouri - Columbia and a M.A. (History) from Southeast Missouri State University. He is currently working on a dissertation in character education to earn a Ph.D. in Educational Psychology.

Monday, June 28, 2010

The Third Depression? Why Paul Krugman may be right, but for the complete opposite reason.

In today's New York Times Op-Ed, "Economist" Paul Krugman stated:

"We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending."

I did not until now believe that someone could seemingly understand economics, have done any amount of research into the the worst Depression of US History - that being the Great Depression of 1929-1941 - and be able to say something so ridiculously wrong.

This column by Mr. Krugman comes on the heels of a G20 where our president was utterly rebuffed by the world leaders when his call for increased "stimulus" fell on deaf or otherwise incredulous ears. Krugman makes the argument that we are headed for a prolonged and painful depression because the stimulus funds that have delayed the day of financial reckoning for state and local governments around the country are drying up.

His column and our current economic situation provides a very applicable opportunity to recall some basic economics and look at recent history to guide our policy.

Right now, America's economy is very stagnant. We have seen modest gains in economic output over the past few quarters, but the very large majority of the growth in GDP has been due to increased Federal spending. The private sector is not growing and employers are not optimistic - we can see that by the slow consumer spending and anemic employment reports. What little economic output we have seen - a brief period of increased auto sales, a brief period of increased home sales - have all been due to faux government incentives. Once the stimulus money dried up, both of these markets plummeted. There was no real growth happening - people were simply moving future purchases forward in an attempt to take advantage of the government handouts.

We may see a few more quarters of modest economic growth, but this is not due to any sort of recovery - it is due to the fact that beginning January 1, 2011, the Bush Tax Cuts are expiring and effectively, Obama will be responsible for the largest tax raise across the spectrum that we've seen since Jimmy Carter. The top marginal rate will raise from 35% to 39.6%, but middle rates will raise as well. In addition to this, the tax on capital gains will go from 15% to whatever one's income tax bracket is - so for the top earning Americans, this will be 39.6%. Also, the Estate Tax (aka Death Tax) will be reimposed from 0% to 55%, making it much more expensive to die after the New Year.

How do these taxes relate to economic growth in 2010? In exactly the opposite way that Reagan's delayed tax cuts caused 18 months of prolonged economic sputtering, Obama's tax increases are forcing creative Americans who have the opportunity to do so to report any income or revenue that they can report for the 2010 tax year in 2010 instead of in 2011. Thus we are seeing a shifting of economic output INTO 2010 when it would have been reported in 2011. Once 2011 hits and those new taxes take effect, Americans will have a greatly increased incentive to work less, work at hiding income, and try to avoid doing anything that makes them a target for the Regime's tax policy.

Therefore, I contend that this government, in order to stave off economic disaster, ought to be CUTTING taxes, DRAMATICALLY and across the board to incentize growth and business opportunity in the private sector immediately - not raise taxes.

In this regard, Krugman and I almost agree - he acknowledges that raising taxes in a time of economic slowdown or depression is quite the opposite tact one should take.

However, we strongly disagree on the next point - Federal "demand side" deficit spending.

Krugman and Obama believe that in times of recession, the Government must "create" demand by ramping up deficit spending. This is a very old, Great Depression era economic viewpoint known as Keynesian Economics, and if it was not shown to be an utter failure by the Great Depression, then I don't know exactly what will demonstrate to these liberals why John Maynard Keynes was drastically wrong in his assertion.

Think of the economy like a large pie that is divided up into two pieces - the Public Sector (Government) and the Private Sector. Obama believes that in times of recession, the Public Sector must spend more money than it takes in from taxes (deficit spending) to create this artificial demand (see "cash for clunkers" or the "homebuyers tax credit"). The problem with this theory is that the Public Sector does not produce anything or generate any wealth on its own, it MUST EITHER take money from the Private sector through taxes, borrow money from the Private Sector (thus crowding out Private Sector borrowers) or borrow from foreign nations (which it must repay with money that is taxed from the Private Sector), or print money (which is never a good idea since this leads to rapid inflation which devalues the purchasing power of the currency and is a back door tax by making the money one earns in the Private Sector worth less).

Let's reiterate - stimulus spending can never be permanent because it is coming from government, which does not generate wealth. Stimulus spending is akin to paying one's left pocket with money from one's right pocket. No net wealth is created. Yes, borrowed money may enter the economy from other nations, but this money must ultimately be repaid, and it will come from taxpayers, thus taking cash OUT of the Private Sector.

Therefore, I propose drastically reducing Federal spending on "stimulus" to prop up state and local governments in addition to greatly reducing taxes across the board. The combination of these two endeavors would free up loads of capital for private investment and business growth in the private sector - where wealth is created. Jobs would come back, businesses would expand, people would seek to earn as much as they could because of the low tax environment, and in the process, far more taxpayers would be created.

Right now, nearly 47% of all American's receive some form of tax benefit from the government, in that they don't pay income taxes. So just over half of America is "pulling the cart". If Obama's agenda continues unchecked, this percentage will rapidly fall to well under half, at which point I fear the country will be truly doomed. But to the point - with such a large percentage of Americans unaccountable for the tax burden in this country, the tax base that the government has from which to draw revenue is shrinking. If unemployment benefits were slashed - inducing people to go seek work to avoid being on unemployment rather than accepting the $30K annual "salary" for doing nothing and we took a much more pro-business policy stance, we could radically change the percent of American's drawing out from the pie and radically increase the percentage paying in.

This effect is charted by the Laffer Curve, first plotted by economist Arthur Laffer. His work was the basis of "supply side" economics, on which Ronald Reagan based the tax policy of his administration. Once the tax cuts took affect, we experienced the largest period of peace-time economic growth in US history. This policy was again embraced by George W. Bush, and in his tenure, it lead to a normal unemployment rate in the high 4s to mid 5s for most of his adminstration - only beginning to tick up once Democrats took over in 2007.

The point in this article is that cutting taxes AND spending will greatly affect economic growth immediately, eventually leading to increased government revenue, giving us a chance to pay down some of our now $13Trillion+ debt. It would also jumpstart a starving economy that will indeed plunge into another Depression if the Obama agenda is enacted.

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