What is happening to the American Economy? Well, it’s really the global economy, but to simplify things…let’s just keep it American. First, people borrowed more money than they could afford to pay back with their income. They financed credit with more credit. This was accomplished through credit cards, car loans and mortgages. Second, the banks went along with it. Finally, the crap hit the fan when the debt came due. Demand for everything softened, because Americans finally had tapped all their credit and couldn’t pay for anything else. There became less demand for homes, so prices fell. Then people defaulted on their mortgages…we have heard this explained a thousand times on the news and we know the outcome. We are living it.
So how do we fix it? Well, there are two models: 1. The Government spends its way out of the mess by spending money it doesn’t have…by spending OUR money. They use OUR debt to finance public projects and employing more people to build the projects. 2. The private market spends its way out of the mess. This is accomplished by massive tax cuts…basically letting businesses and individuals keep more of the money they earn.
Fans of Option 1 believe that the private market got us here. That is partly true. People got greedy and either loaned money on risky investments, or spent more than they made. Both parties in Government turned a blind eye. But is doing the same thing (Government spending more than it brings in) going to solve the problem? Don’t two wrongs make a wrong? The reason the American economy is in a tail spin is very simple…no one is buying anything. People are scared so they have cut back on spending. In part, this is irreversible, because we spent more than we could in the past. So, no matter what happens, Americans will spend less, because there is less credit.
Well, if the problem is less spending then the solution needs to be getting Americans to spend more (since we are anywhere from 2/3rds to 3/4ths of the economy, depending on the economist). The theory is, if Government spends more, it creates more jobs allowing people to spend more, because they have their new government job. But, what if instead we gave everyone that currently had a job a lot more of your money back by cutting taxes? What if we cut business taxes drastically for a period of time then gradually increased them? Businesses would have a lot more money and so would consumers. Consumers would buy more, because they have so much excess money to spend. This creates more jobs, so businesses can keep up with demand. Businesses have more money to keep current employees, make investments, and hire new help. More people have jobs, so they can keep spending money. Say goodbye to the recession.
So what happens when the tax cuts are gone and taxes increase? Well it must be increased gradually and if done gradually over time, the consumers will keep spending, because they have jobs, and businesses will keep hiring and not firing because they have consumers. Remember, the Government’s spending plan ends too. Eventually they will spend all of their money building the roads and improving the schools. What happens then? Well the roads are built and the schools are fixed…so time for layoffs? Allowing Americans to spend their own money will increase demand faster than the Government can implement its programs and by giving everyone 13 more dollars a week. Tax cuts are more drastic and immediate. People see the effects quicker and react quicker. Do our roads need to be fixed? Of course, but that can be dealt with at another time. Right now, we need to simulate the economy and fast. The Democrats can deal with education, infrastructure, and their other pet projects at a more appropriate time.
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