Friday, September 3, 2010

Is the Price of Getting Out of the Recession Too High? We’re paying the bill for the government spending.

So I have recently started a new job where I at time write blogs on various policy issues that my boss requests and I am quite proud of this first one that I wrote. It's not too complicated so give it a read!

Problem: The economy is sluggish and has been since the recession began in December 2007.

Symptoms of our problem: Economic activity takes a downward trend for an extended period of time. Additionally, when public opinion is that economic activity is going to slow, individuals and business are more likely to save than to invest. Businesses may also choose to lower employment or stop hiring. Lower consumer confidence creates a downward cycle that deepens an economic depression. Production also tends to turn down during a recession. Also, there are more opportunities for mergers between companies (which decreases competition and, in turn, results in negative effects on our economy). Because of increased unemployment, living standards for those whose income is from salaries/wages are more volatile than those whose income is fixed. General instability promotes lower consumer spending.

How do we solve the problem:

  1. Lower taxes
  2. Stop Federal Spending
  3. Boost investments
  4. Increase consumer spending ("How to Successfully Stimulate the Economy by William Beach)

So, my question is this: if lower taxes would stimulate the economy, then why are we seeing taxes increase in 2010 (and over the next 10 years)? Did Obama forget his I-won’t-raise-taxes-for-middle-class-families promise? And why are we seeing bill after bill increasing federal expenditures? (The I-won’t-increase-the-national-deficit promise has obviously been forgotten, as well)

American’s will be picking up the check for two bills, in particular, passed in 2010. First, there’s the $503 billion healthcare bill passed in March. How exactly does Obama plan to pay for healthcare for everyone? Curtis Dubay outlines the breakdown of the revenue for the Patient Protection and Affordable Care Act (PPACA).

1) A 40% excise tax will take effect in 2018 and will be applied to healthcare plans above $10,200 for individuals ($27,500 for families). As effect, healthcare plans will be more expensive for everyone including those in the below $250,000 tax group (yah, the same ones President Obama promised not to raise taxes on).

2) The portion of payroll tax taken as Hospital Insurance (HI) will be increased from 1.45% to 3.8% (including the employer’s portion). This tax will begin in 2013 and will mark the first time that a payroll tax has been officially designated to fund an entitlement besides Social Security and Medicaid. (FYI, because the tax brackets are not inflation-adjusted many of the families that are now below the $250,000 threshold will be taking on this tax by 2013)

3) In addition, the newly raised “payroll” tax will also apply to investment income as well as payroll income (Perhaps the tax should be renamed. Before we know it, it will be called the “money-your-grandma-gave-you-for-Christmas” tax).

So, the good news is we got everyone in America healthcare. The bad news is the system will maintain the same inequities and inefficiencies it has now, the coverage will not be any better, the plans will be more confusing, and you and your children will be paying for it…forever.

Second bill (don’t worry, this one isn’t as frightening): August 11, 2010, the “Education Jobs Fund” was passed granting $10 billion to the states to save the jobs of teachers and other government workers and another $16 billion to bail out Medicaid. Congress’ plan to pay for this bill comes in two parts; firstly, tax increases of international business (accounts for about half of the estimated expenditure). The rest of the cost has been accounted for by cuts to children’s nutrition programs scheduled to occur in 2014. Somehow, it feels although that idea will never materialize though. Firstly, will future-Congress be willing to cut the lacking $20 billion from the food stamps and nutrition fund for children when just over a year ago, the stimulus package granted $21 billion to the same sector. Is it just me or are we going in circles here? Unfortunately, this most recent bail out will mostly likely become part of our national deficit or be realized through tax increases in the next ten years.

So, the disaccord still exists. The bills mentioned were passed explicitly to relieve the recession. Yet, the higher taxes leave less money for consumers to invest or spend in the market. Government spending is at an all time high and the national deficit is growing. The payroll tax on Investment income leaves less incentive to invest. The increase in the HI tax will make medical care less competitive. The increased tax to international business decreases incentives to own international business and the United States loses more jobs overseas.

And here’s the kicker – stimulus plans don’t work. It didn’t work in 1930 with the New Deal, it didn’t work in 1990 in Japan, and it didn’t save us in 2008. If there was a money tree from which Congress could pick cash and throw it at the economy to increase demand, it would be a fruitful plan. But since the stimulus plans are paid for by taxes and loans, the money comes from the existing economy. Therein lays the problem of stagnation. All we’ve done by passing more bills is to redistribute the depressed economy. Every stimulus act Americans allow Congress to pass is us figuratively throwing our hands in the air out of confusion and fear, handing over our future paychecks to the all-knowing Obama administration, and saying, “I can’t figure it out, you handle it!” And that’s outrageous! And more importantly, that is not what Americans are about.

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