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Balanced Budget ≠ Balanced Economy

Posted on the 07 June 2012 by Anthonyhymes @TheWrongWing

The Republican ranks detest the idea of big government, and many of them rightly blame politicians for failing to balance their budgets. But the problem of a balanced budget is in reality the problem of an unbalanced economy. Economies need growth, and the government in a way exists to offset the money paid out to nurture growth. Balancing a budget is a dangerous way to extinguish fragile growth, as European economies such as Greece and Spain have recently proven. The economy itself should come first. 

balanced budget kills growth

Everything in the world is balanced, there can be no other way

What is government other than the organized arm of society, put in place to facilitate the services that citizens need? While the Republicans argue that more sectors should be privatized — which may or may not be appropriate depending on the case — there are certain services that cannot be profitable if they are to be provided to everyone who needs them. Because these services need to exist, the government eats up funds that come in from taxes. The only real answer to balance a budget is to transfer the burden from debt to the citizens. That comes from raising taxes.

But raising taxes kills consumption, which, especially in America, is the main driver of the economy. People have less money in their paychecks, so they spend less. They put off big purchases, and they save (invest) less money. The result is a drop in business. As businesses start to sell less, they lose money, which in turn means that companies can’t afford to pay all of their employees. Unemployment rises. Growth stalls.

The opposite, and something that the Republicans tirelessly pursue, is to cut down the size and therefore the function of government. By eliminating services the government saves money they would have spent. This will lead to a balanced budget. Yet it is crucial to understand what it means to cut services. Services are provided by people, who are paid by the government. Less services equals less employees. Less services also means that people need to save more for unexpected events in the future. For example, cutting road repair means that people will spend more money on fixing their tires and alignments as the roads deteriorate and they hit more and more potholes. The effect of eliminating government services is in fact similar to that of raising taxes, except it adds a level of risk to the country’s economy.

Investment comes from saving. If people are confident that the economy will grow, they will invest their money in things like mutual funds and the stock market, which turns the capital over to companies to develop and grow. If people are not sure when they will need their money, they can’t have it tied up in things like real estate or an IRA fund. They need liquidity, which in turn stunts stock markets, property, and therefore business. If companies can’t invest in spare capacity and expanding workforces, they will not be able to grow.

Balancing a budget does nothing to stimulate economic growth, and it only means that taxes rise or services get cut, both things that kill growth. As the country has seen with the bailout, the government had to step in, assume more debt, just to make sure that the economy stayed relatively balanced. The cause for our massive debt came from a Republican anyway (both with W Bush’s trillion dollar wars and his engineering of the bailout which Obama then  implemented), a fact that Republicans are quickly willing to forget.

Europe is finding out that austerity, or the process of cutting back public spending to balance a budget (or come close to a balance), during a recession only means more recession, and even depression. People need to have jobs, so that they have money and the security to spend that money, which in turn fuels businesses that sell things and can hire more people, which means that unemployment drops. It is only by following the steps towards a balanced economy can we even begin to have the conversation about balancing a governmental budget.

 


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