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Fairy Tales of the Coming State of the Union: We Need to Cut Government Spending And Make Do with No More Money

letsgetitdone's picture

In "All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President will probably deliver in his State of the Union Address next month. I view the coming narrative as very likely to be composed of a number of fairy tales. Three previous posts, here, here, and here, have criticized three of the fairy tales I expect to be in the narrative. This post examines the fourth fairy tale, the idea that we need to cut government spending and make do with no more money.

This fairy tale is almost a corollary of the others. If it's true that 1) the Government is running out of money; 2) the Government can only raise money by taxing or borrowing; and 3) we can't keep adding debt to the national credit card; then it almost follows that we need to cut Government spending and make do with no more money. However, in the first three posts in this series we've seen that these other claims are fairy tales, so the underpinning for this one becomes immediately suspect.

In addition, even if the first three fairy tales were true, one would have to ask why we can't tax the wealthy more to “raise” money? The standard reply these days is that you can't raise anyone's taxes in a recession, and another more honest response might be that the Republican members of the House and Senate and the Democratic blue dogs in these bodies are unwilling to raise taxes to get the Government more money, so it's just politically unfeasible to do that. While that may be true, in spite of the fact that a heavy majority of Americans thinks that we ought to be taxing the wealthy much more than we are, we can't judge whether there's any truth in the fairy tale by factoring in the political feasibility of the possibility that shows that it is, indeed, a fairy tale, because even if we couldn't borrow anymore, even if we were running out of money, and even if we could only raise money by either taxing or borrowing, it would not be true to say that we need to cut Government spending and make do with no more money, since we could get more money by taxing the wealthy.

In fact, the very statement of this fairy tale is intended to persuade people that the alternative of taxing the wealthy doesn't exist. But all of us know that isn't true and what is really in question is whether Congress and the President are willing to represent the views of the majority of Americans or the narrow economic interests of the wealthy.

We know what the answer to this question really is right now, because we saw the answer in operation just a few short weeks ago. And so we also know that the real truth is not the fairy tale that we need to cut Government spending and make do with no more money, but the truth that we need to break the hold that the wealthy and the large corporations currently have on the American Political system which looks more and more like a plutocracy, and less and less like the American democracy of myth and our fondest hopes.

Some may insist that reducing Government spending and not raising taxes on the wealthy is a better alternative than doing the opposite and so, provided the first three fairy tales are true, this one would be true too. This view however, is supply-side ideology contradicted by economic studies that show that the Keynesian multiplier of tax cuts for the rich is only 0.29 for every dollar cut, while the multiplier for food stamp spending, recently cut to “fund” the child nutrition program is 1.73 for every dollar spent, and the multiplier for extending unemployment to the “99ers” is 1.64. More generally, if it were true that the Government must actually “fund” spending, then it would also be true that Government spending on food stamps and unemployment and other high multiplier expenditures would deliver five times the GDP growth impact than maintaining tax cuts for the rich.

Of course, the rock bottom argument of those who want us to believe that we must make do with less money and less Government spending, is the notion that government spending is always inflationary and that even if such spending is offset by higher taxes on the wealthy, inflation is our fate if we rely on it. However, this argument is clearly bogus, since, we are here talking about the scenario in which increased Government spending is offset by higher taxes on the wealthy, so, unlike the case of deficit spending, no new net financial assets are being added to the economy, since the money created by Government spending, is offset by the money destroyed through taxing the wealthy. In spite of this however, we'll still improve the economy by changing the distribution of savings which affects the amount of aggregate demand to be expected.

In short, there is no argument that could save this fairy tale, even if the first three fairy tales on which it relies were true. It is pure ideology -- evidence- and fact-free, designed purely to serve the interests of people who have long ago lost their sense of proportion, fairness, and obligation to their country, the country that afforded them the opportunity to become wealthy in the first place. To those people I say, the real fairy tale here is the fairy tale of your entitlement to get everything you want, whenever you want it. The longer you insist on that fairy tale, the greater will be the price you'll pay when the day of reckoning arrives.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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