Sunday, April 27, 2008

Clinton and Obama simply can’t have it all!

The article, 3 Candidates With 3 Financial Plans, but One Deficit was published in the NY Times on April 27, 2008.

The marathon of a primary season continues with attention focused on the candidates' issues regarding deficit spending (high government spending relative to tax receipts) or deficit tax receipts (low tax receipts relative to government spending). The Republican Party is famous for its Reaganomics view of tax reductions, which would result in deficit tax receipts if spending is left unchecked. Lowering taxes produces incentive to both firms and workers to increase production, and the economy grows. Alternatively, the Democratic Party focuses on increased spending, which results in a deficit spending if tax rates are left unchecked. Higher spending produces new programs, leading to new jobs and production, and the economy grows.

Regarding stated policies on fiscal measures, the Democratic Candidates, Hillary Clinton and Barack Obama, do not adhere to their strong party fundamentals, while the Republican Candidate, John McCain does adhere to his party's fundamentals. Further, Hillary Clinton and Barack Obama promote plans that simply don’t add up.

Tax Rebates are economically impotent

Simply put, a tax rebate is a very temporary tax cut that has little or no economic impact. Amid a slew of spending ideas with high price tags, Senators Clinton and Obama support further tax rebates (short-term cuts), which is not part of the Democratic machine regarding high spending. Further, there is little or no long-term benefit to a tax rebate. It will likely result in higher consumer spending, giving a much-needed boost to the economy, but for only a quarter or two (up to six months). After that, consumer spending will decline. The one positive point comes from the nature of the national accounts where GDP is measured. If, for two quarters, consumer spending (which accounts for 70% of GDP) receives a boost, the economic numbers may just skirt recession territory. The economy is in a slump, but the technical analysis would not support a recession.

Permanent Tax Cuts are economically powerful

A tax rebate is a small creek with just enough water to trickle down its path, while a permanent tax cut is the Nile River. Families and firms plan ahead, monitoring their future income and costs. On balance, higher life income from lower tax payments results in a rise in spending for many years. The more permanent the tax cut, the longer will the effect last.

Spending still needs to be monitored

Either way, with higher spending or lower taxes, loose fiscal policy, if left unchecked, leads to economic problems. The Democrats, in their proposals of healthcare reform, banking regulation and a mortgage moratorium, and subsidy spending, must raise taxes, rather than promoting rebate checks, to balance the budget. Higher taxes will result in lower consumer spending, hurting economic activity in the long run. It is simply just not feasible to have both higher spending and tax rebates, and one must make a choice. Wouldn’t it be great to have more than 24 hours in a day? John McCain adheres to his party fundamentals by pushing tax reform only. He has not proposed new spending, like healthcare reform, understanding that one cannot attend the baseball game and clean his bathroom at the same time. Further, lowering taxes leads to higher consumer spending, stimulating economic activity in the long run.

Putting the merits of deficit spending or deficit tax receipts aside, if the government continues to run an un-balanced budget for too long, without paying down any debt, future economic activity will suffer. Think about borrowing money from the bank every month. If the debt is never paid down (even partially), the bank loans will stop and the borrower will be faced not only with a lack of new funds (to buy a house, to finance a car, or to start a business), but a growing share of income will go to pay off existing debt. This is the situation with the U.S. government – it is okay to borrow from foreigners (selling debt securities like the 10-yr bond to finance two wars or rebates), but it must be paid off, at least partially, at some point.

Welfare is obviously an issue

In the end, a political leader’s policies should be tied to the voters and the well-being of all who live in the United States (and abroad). The answer is not obvious, but it seems that given our current international obligations, John McCain’s taxing policies are more surely implemented, rather than the Cheesecake Factory menu-size list of spending and tax relief policies pushed by Senators Clinton and Obama.

I am happy to read and post answers to any comments/questions that you may have. Nontruths

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