Saturday, February 5, 2011

Economics Post, Part 1

JOBS AND THE DEFICIT

In which I set out in a basic way the economic issues facing the country. No numbers or links, but they are out there; Nobel Prize-winning economist Paul Krugman's blog is a good source. Read this with an open mind.

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Unemployment and the depressed economy is a problem *now*; the deficit is a problem for the future, and fixing the former will reduce the latter.

Here is the basic vicious circle we are in:

1. Businesses are unable to sell existing products.
2. Therefore they are not making as many widgets-- they have excess capacity.
3. Not as many employees are required to make fewer widgets, so no hiring, and layoffs.
4. Unemployed people have less money to spend; the employed are playing it safe, and saving more.
5. Therefore they are not buying existing products.
Back to: 1. Businesses are unable to sell existing products.

On the fiscal side of the issue, because there is less production and less income, less money is being taken in as taxes, and more money is being paid out in automatic compensators: unemployment, welfare, Medicaid. The government is not making as much money because of the depressed economy, and is spending more. This will increase the deficit.

The obvious corollary is, if the economy were not depressed, and there were more production and more employment and more income, less money would be spent by the government on unemployment/welfare/Medicaid, and more money would be taken in, decreasing the future deficit.

Therefore, the goal should be to improve the economy and lower unemployment. In addition to being a good thing in its own right, this would automatically tend to decrease the deficit without raising taxes: an expanding economy would mean more tax revenue.

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