Remedial Economics - For those who either don't believe or don't understand

Hoo-boy. Glenn Beck’s got a plan to “save” America. You can read a little about it HERE. It’s the typical Right Wing garbage and for all his praying and crying about it, it won’t in fact save the country. All it will do is DESTROY the economy, while being deficit neutral at best. Perhaps the biggest irony in all of this is that it’s really just another cynical attempt by the Right to let the Rich grab (and keep) a whole lot more money. The IRONY is that, were this implemented, it would be as DISASTROUS for the Rich as it would for the poor. It would, in fact, BRING ABOUT the very economic calamity that Beck is trying to avoid. Although… given that Beck has repeatedly revealed himself as an anarchistic, nihilist LOON, maybe he’s TRYING to being this calamity about! I mean, if the world DOES end, suddenly that guy on the corner wearing the sign doesn’t seem so crazy! But I digress. The reason that all these conservatives keep saying “CUT Taxes, CUT Spending” as a recipe for both fiscal and economic success is that they (1) don’t understand Keynesian Economics and (2) they’re blinded by their ideals (and their greed) and can’t stand the idea that someone (other than them) gets any money that these guys don’t think the recipient “earned.”

Now… last year I promised a primer on Keynesian economics that I never quite got around to. Well... with Glenn Beck in full-on crazy mode, maybe a little education for everyone is in order. And I think I’ve got an example that will make this clear. It’s oversimplified, so it’s NOT intended to convince those who don’t believe it. but rather to explain it to those who don’t understand. So if you think stuff is really complex: THIS BLOG POST IS FOR YOU! I’ll show you how it’s not as hard as you think.

We’ll start off by putting out a couple of “givens.” These are FACTS, not talking points, and there’s no legitimate economist anywhere who will disagree with them. There are FOUR THINGS a government can do, relative to its ECONOMY and its DEFICT:

1. Raise Taxes
2. Cut Spending
3. Cut Taxes
4. Raise Spending

And while economist may quibble of the DEGREE, directionally raising taxes and cutting spending do the same thing and cutting taxes and raising spending do the same things:

• If you (1) Raise Taxes or (2) Cut Spending, you will harm (shrink) the economy and you will help (shrink) the deficit.
• If you (3) Cut Taxes or (4) Raise Spending, you will help (grow) the economy and you will harm (grow) the deficit.

None of these are up for debate! If you don’t believe either of the two preceding statements, you are either too conservative or too liberal for your own good. These are FACTS. Take an economics course if you don’t believe me. And besides, taken together, they are neither liberal nor conservative. They are BALANCED. Where the libs and cons disagree is over which one does MORE, which one helps or harms MORE – taxes or spending. I’m not going to settle THAT debate here, (hint: it's SPENDING) but I will explain what the Keynes model states, and show you how it works.

The important part of the Keynesian model is what happens when you do both in unison. Now, obviously if you did (1) and (2) you could erase the deficit, but you’d destroy the economy doing so. I’m sure lib’s and con’s alike would agree with that. Likewise, if you did (3) and (4) together, you’d have a BOOMING economy… but before long you’d have some pretty crippling debt. I’m sure we can all see why that won’t work either, but I’ll include in my example anyway. Where Keynes get’s controversial (though he’s absolutely right, and I’m going to show you why) is the following:

• If you (1) RAISE taxes by, for example, $1 Billion and you (4) RAISE spending by $1 Billion, you will, in fact, RAISE the collective income of everyone in the economy by $1 Billion, while not changing (or creating) a deficit AT ALL.
• If you (3) CUT taxes by $1 Billion and (2) CUT spending by $1 Billion, you will LOWER the collective income of everyone in the economy by $1 Billion, while not changing (or creating) a deficit AT ALL.

This is known as the “balanced budget multiplier” and it EQUALS 1. This means that if taxes and spending move in the SAME DIRECTION by some amount, INCOME will also move in the same direction by “one times” that amount. Also – as this is the very definition of a ‘balanced budget’ it should be obvious that the deficit is not affected.  (It's the actual defintion of deficit-neutral.)

How does this work? I’ll demonstrate:

Let’s say we have a country with just two people living in it: Connie and Libby. Connie is a retailer and real estate developer. She owns all the stores and all the land. Libby is broke and unemployed. She doesn’t have a pot to squat in or a window to dump it out of.

Now, in Fiscal Year One (FY1) Connie makes an income of $100 and Libby made $0. Our starting deficit is $0 and the collective income earned was $100. (100 + 0)

Seeing as how Libby is on the verge of starving to death, naked, sleeping under the stars, the government of this fine country is going to implement a relief program if Fiscal Year Two (FY2.) We are going to RAISE TAXES on anyone making over $50 (Connie) by $10 and give Libby a check for $10 to live on. Now… you may be tempted to say, “Connie now has $90, Libby now has $10, and all you did was rob from the rich and give to the poor and society is no better off.” But you’re wrong. Libby was living in poverty. Now that she has some money to spend, she’s going to buy some food clothing and shelter. IOW – she’s going to SPEND he $10. And since Connie owns the only store and the only apartment complex, she’s going to spend that $10 at Connie’s businesses. So Connie’s income will actually be: $110 (pre-tax), $100 (after-tax.) Despite the tax, her after-tax income didn’t change. Meanwhile Libby enjoyed an income of $10. So our society income is now $110: Connie income ($110 minus $10 in taxes) plus Libby’s income ($10). I managed to raise one person out of poverty without incurring any deficit or debt and without really lowering anyone else’s income! Pretty cool, huh?

Now… if I did that WITHOUT raising taxes? Sure, things would have even better: Connie would have had $110 and Libby $10 and or society would now have an income of $120… but would also now have $10 worth of debt as well. I’ll now demonstrate why that doesn’t work, in the long run.

Let’s say that in FY3, word of our great society begins to spread and another unemployed dead beat, Demi, moves in. Now… I COULD raise Connie’s taxes by $10 again, pay Libby and Demi $10 each and we’d be (collectively) up to $120 in the same manner:

• Connie would make $120 and pay $20 in taxes, for $100.
• Libby would have $10 in income (that she’d spend with Connie)
• Demi would have $10 in income (that she’d also spend with Connie)

But Connie’s a Republican and feels she’s being taxed enough. And since Libby and Demi didn’t make it to the polls, let’s assume we can’t raise taxes. So in FY3:

Demi and Libby will get their $10 checks, and spend them with Connie. Connie will thus get $120 in income, and pay only $10 in taxes. So $10 + $10 + $110 = $130 in collective income, and $10 in debt. ($10 in taxes, $20 in spending = $10 of debt.)

So now we're in FY4. Connie still makes $120 and pays $10 in takes. Libby and Demi still get their $10 checks. (Collective income of $130) BUT I have to pay interest on that $10 I owe. Let’s assume the interest is 10%, and that the bonds aren’t held by Connie, Libby or Demi. So I take in $10 in taxes, but I have to pay $1 in INTEREST. That leaves me $9, to pay out $20 in benefits with. So my deficit (now $11) gets added to my debt ($10) and I now OWE $21.

FY5: Connie makes $120 and pays $10 in Taxes. Libby and Demi get their $10 checks. Out of the $10 in taxes I collect, I now need to pay $2.10 in interest (10% times the $21 I now owe.) That leaves me just $7.90 to pay $20 in benefits with! So my defict is now $12.10, which gets added to my debt of $21. I now owe $33.12.

I’m sure by now, you can see the trouble we’re in. Despite maintaining my country’s income at $130 (instead of the $120 there would be if I had just raised Connie’s taxes) our debt is quickly spiraling out of control. Without cutting spending, or raising taxes, in just a few years, all of my tax revenue will be going to pay the interest on my debt!  So either I have to raise taxes or cut spending, and both will harm my economy.
  
So let’s do the CONSERVTAIVE thing, and get rid of those benefits. We still owe $33.12, but in FY6 we won’t pay out any benefits. So Libby and Demi will go back to making $0, and since they won’t be spending anything, Connie’s income will also drop to $100. Now… she’ll still have to pay her $10 in taxes, so her income is now $90. And my country’s income went from $130 down to just $90. A FORTY dollar drop, due to a $20 reduction in gov’t spending. Even if we cushioned it with a $6.69 tax break for Connie (so I can still pay the $3.31 in interest I owe) her income only goes up to $96.69. So my contry loses $33.31 in income, when I cut taxes by $6.69 and cut spending by $20.

So let’s go back to FY4 and pretend we raised Connie’s taxes to $20, and maintained our balanced budget. Connie will have [$120-$20] $100 in income, and Libby and Demi each get $10. So my country has an income of $120, and NO DEBT. And we get a new president who want to CUT taxes and CUT spending by $10 Each. So, in FY5 Libby and Demi only get $5 each, and Connie goes back to paying $10 in taxes. Because of thier reduced incomes, Libby and Demi can only spend $5 each. So Connie pre-tax income dropped to $110. She pay $10 in taxes, so she’s back $100. Combine that with Libby’s $5 and Demi’s $5 and my country’s income is now $110.

Did you see that?

It went DOWN by $10 after I cut taxes by $10 and cut spending by $10!

And, if you recall from way back in FY2 (and what I first proposed for FY3,) it went UP by $10 when I RASIED taxes and RAISED spending by $10!

And that’s how (and why) the Keynesian model works! It recognizes that an economy is more than just production. Production is necessary, of course, but without CONSUMPTION all the production in the world won’t make you a penny. You need to MAKE STUFF and you need to SELL IT. If people can’t buy it, it doesn’t matter how much you produce. It also recognizes that people don’t KEEP all, or even most, of their income. They SPEND it, and it then becomes someone else’s income! (And so on, and so on…)

Now… there are two legitimate criticisms of the Keynesian model - one from Professor Arthur Pigou and one from Nobel Laureate Milton Freedman, both of whom are conservatives, economically and fiscally speaking. As I said, they’re legitimate… but IMHO they’re also misguided and thus not applicable outside of academic discussions. If anyone is interested, I can explain them, and explain with they’re wrong. Otherwise, I’d like to hear what y’all think of this, and answer any questions (or criticisms) you have first.

In any case, given the TRUTH and FACT of the Keynesian model, it should be pretty clear that Beck's "plan" would destroy the economy and not really help the deficit.  Nice plan, huh?  I'm serious when I say that he's not really even TRYING to save anything.  He a nihlist.  And his every word demonstrates this.