AUSTERITY VS. STIMULUS

One of the first points that I remember from Macroeconomics (the study of the overall economy) is that:  C+B+G=GDP.  Basically, the Economy is a combination of spending on the part of Consumers (C), Business (B) and the Government (G).  Consumer spending historically comprises approximately 70% of the total and, thus, Economic Activity.  GDP (or Gross Domestic Product)  represents the total of all Goods and Services produced by a Country.

During a recession like we recently witnessed, when people are out of work, or fear they could lose their jobs, they tend to cut-off all but the most essential purchases.  If one of the other spending components, Business or Government, can make-up the difference, the Economy can keep functioning.  Over the past several years, however, Business–having seen the demand for Goods an Services reduced–cut-back on spending, as well.  Therefore, the US fell into the deepest recession since the 1930s. That’s why Government had to step-in.

Stimulus was called for to create Infrastructure Projects and to provide money for States so they would not have to lay-off Teachers, Policemen; Firemen, etc.  Likewise, there are many long overdue Infrastructure Projects (i.e. Roads, Bridges, Schools, etc.) that badly needed repair–an expense that will just increase as long as such projects are neglected.

By putting people to work, or from reduced lay-offs, the amount of Consumer Spending can assist in maintaining a sufficient GDP, until the Economy can effectively repair itself.  Congress was not, however, up to the task of providing sufficient Stimulus to keep the situation from getting worse.  Unfortunately, Washington, D.C. suffers from a horrendous case of Gridlock.

The idea of keeping people working is that they spend money, and pay taxes on their earnings.  Also, when they spend money, that creates or maintains the jobs of others who pay taxes.  And, the WIN, WIN, WIN situation from this is that more people working multiplies into more jobs and tax collections can begin to rebound.  In effect, that is the better way to Balance the Budget.  NOT AUSTERITY.

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