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Tuesday, March 2, 2010

Simple Economics

Economics is not too complicated when you really look at it. It quite a lot like having good old common sense but a lot of the political elite either don’t get it or they are motivated by something more important to them than intelligence. Simple economics is you have something I need and to get it I give you something you need of equal value. In a Marxist economy I have something you need and you go get the government to take it from me. Sounds like what we are doing now. Anyway.

In a recession you want people to spend money. As I explained in my October 2009 blog every dollar spent in the private (non-government) sector is multiplied by a factor of three over a period of time, whereas if the government taxes a person the value of that dollar taken from them is reduced in to about eighty cents.

If government is trying to stimulate the economy by borrowing money then it makes it harder for the everyday businessman. The pool of money is not a separate pool for the government and a separate pool for the private sector. It is all one big pool. If the government borrows money from the pool then there is less for the private sector to borrow and thus the cost of borrowing goes up in either interest rates or the requirements of borrowing become more difficult. That is part of what we are seeing right now in this recession. Small businesses can’t get the money they need just to be able to maintain their current level of operation.

One writer compared it to taking a bucket out of one end of a pool and pouring in the other end and bragging about how much good work you’ve been doing. The problem when government borrows money there is always an overhead (bucket spillage) cost you don’t have in the private sector. There is always the extra handling, the delays, the restrictions, etc.

Consider also that the average public sector worker is now making an average of $70,000 a year while the average private sector worker is making about $40,000 a year. Every hour a public employee does the same work as a private sector employee it cost America almost twice as much. So even if the government was able to process tax payer’s monies and put it back into the economy at the same rate as the private sector we still lose a certain amount of value of the money. The government does not produce anything or add value to anything; they are simply an expense added to the cost of living in America. Anytime the government gets involved it cost more.

The more government cost us the more they want to raise taxes to cover their cost. They just love to spend and spend and spend other people’s money. Most of us when we have spent more than we should by over borrowing we realize at some point that we must stop spending and start paying back the money we borrowed. Otherwise the people we owe will come and take all those things away that we didn’t have the money to buy anyway. At some point when we’ve used up our credit and we have to start paying cash for everything. Then we must tighten our belts and do without things. Even the necessities may get cut if other things have a higher priority. We, you and me, don’t not have the luxury of raising taxes to cover our extravagant ways.

The government simply says you should pay them more so they can continue to spend all the money they want to on whatever luxury items they desire, just tax and tax and tax. The problem is the more they tax the less value the money has. Remember that the value of a dollar taxed when returned to the economy is eighty cent. The more they tax the less it becomes so the economy decreases and soon we will look like California or even Greece, very bad indeed.

The opposite is true if you cut taxes. I said before that for every dollar spent in the private sector it become about three dollars over a period of time. If the average person was paying taxes at a rate of 10% then for every dollar “added” to the economy it would return 30% in taxes over a short period of time. That means you would collect more in taxes when you give back a dollar to the private sector economy. What would be the fastest and easiest way to “add” dollars to the economy? A great big tax cut. For every dollar the government would cut in taxes it would return two dollars back, a 100% increase in tax revenues. That seems simple enough. That formula has been proven to work every time it has been tried.

In addition if we cut business taxes in half or more then money from outside the country would start flowing into America and add even more dollars to the economy and therefore even more tax revenue to run the necessary government programs and pay off this huge debt. Cutting business taxes would reduce the cost of manufacturing in the US so we could start producing things here again creating more and more manufacturing jobs for Americans. There is already thirteen trillion dollars in American money sitting in other countries because it cost too much (tax wise) to invest those dollars here. That is American money held by American companies and investors. How would an influx of thirteen trillion dollars affect our tax revenues? We could pay off our debt, end deficit spending, run all the programs we "need" (not want) and even return Social Security money back to the people who earned it (with interest). I would love to have that deal. And by the way, get rid of the IRS.

Jobs would increase so everyone who wanted to work could and make more money than ever before. There would be no need for welfare except for the disabled and elderly. That is not the socialist utopia some now want, it is the utopia of the American dream, freedom for life, liberty and the pursuit of happiness.

Cut taxes, spend more private (not borrowed) money, and get more investment money and jobs. Wow what a no brainer, except when it comes to our president(s) and congress. Maybe it has something to do with power and control and not common sense, duh.

If we did cut taxes the only problem would be to get our government to stop spending more than it makes. Just like you and me we have to know our limits. It is up to the people to be the good parent and just say “NO” the next time you go to the polls. Elect people who believe in spending less, taxing less and governing less with fewer restrictions. That is what made America great before and we can do it again.


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