What Actions Should a Government Take to Produce the Best Economy?
Looked at objectively, there should be an answer to that question. “Big Data” can keep track of all our searches, travels and purchases, and provide highly targeted advertising based on the patterns of our lives. Surely, it’s possible to take information on tax increases or decreases, job growth or loss, economic expansion or contraction and other factors to determine a “Best Practices” approach for government.
What we have instead is a system where politicians, economists, pundits and even people like me make bold statements about the merits of various actions and promises that their plans are the only ones that produce the best economic outcome. If policies are not derived from careful objective data analysis, but rather from our elected leaders’ long held beliefs – or cronyism – then their proposals for economic renewal or stability will differ wildly. I will try the careful objective data analysis approach.
A few givens
1. Different economic policies produce different winners and losers;
2. In general, liberal and conservative members of Congress represent opposing sides of the economic winner/loser equation;
3. The thing about long held beliefs is that it is really hard to change someone’s mind, even with indisputable evidence;
4. Indisputable evidence doesn’t seem to exist in economics – you can always find an opposing view;
5. Consumer spending accounts for about 70% of the U.S. economy when using gross domestic product (GDP) as the metric;
6. The personal savings rate in the U.S. is about 5% and wealthier Americans have a higher savings rate than poorer Americans;
7. An income tax cut gives people more spending money which stimulates the economy and leads to job creation when spent;
8. A cut in government spending reduces business income for some companies and reduces the number of public and private employees. Consequently, some people and businesses have less spending money which acts as a drag on the economy and reduces job growth;
Not everyone agrees with these “givens”
1. The wealthy get wealthier with tax cuts, but the poor may be worse off because they see less support from social safety net programs since tax cuts usually come with spending cuts. Proponents of tax cuts as a way to stimulate the economy claim that their policies lift all boats, so everyone wins when taxes are cut because there are more jobs and less need for the social safety net.
2. Conservatives generally favor lower tax rates for high income earners and liberals generally favor higher upper-income tax rates and more money for social safety net programs.
5. While the 70% of GDP number is not in dispute, some strong business proponents contend that it’s the wrong metric to use for evaluating the impact of consumer spending on the economy. GDP discounts the economic activity from the intermediate steps in the process to bring a product to market. For manufacturing, as an example, the final product of a detergent uses raw materials that were produced by another company that used other raw materials supplied by a third company and so forth. For domestic production, that detergent has a more substantial impact on the U.S. economy that does an imported detergent because of those people and companies in the U.S. who produce the raw materials. Valid point. One estimate I have seen suggests that by including the intermediate production in addition to GDP, consumer spending drives only 30% of the US economy.
Should the Federal Government Cut Taxes and Spending?
The republican presidential candidates all plan to cut taxes and simplify the tax code. They claim that the tax cuts will stimulate the economy and create more jobs than are lost from the corresponding cuts in government spending – a necessary action if the budget deficit and debt are to be contained. To figure out if tax cuts are the correct solution and if so, what the tax rate(s) should be, we need a way to judge the effect of factors which impact jobs and taxes.
The Equation – My Own Formula
Net Job Growth =
# Jobs Created by Individual Income Tax Cuts +
# Jobs Created by Business Tax Cuts –
# Jobs Lost from a Simplified Tax Code –
# Jobs Lost due to Federal Government Spending Cuts (to minimum government size) +
# Jobs Created by Increased State & Local Spending (transfers from federal gov.) –
# Jobs Lost to Inefficiencies in State/Local vs. Federal Management of Services +
# Jobs Created by Increased Social Security & Medicare Spending for Baby Boomers
I will comb the available data to arrive at numbers for each of those items in the equation and present my reasoning, calculations and sources. This is a really big topic and I’ll break it up into several parts. These posts will be less narrative and use more bullet points than I typically employ in order to make the math easier to understand (I hope). So, let’s get started.
Next Time: Part III-A: What Should We Use for the Minimum Size of the Federal Government?