Economic decisions involve more than reducing taxes

Over the past few months, I have been following the policy debate between Republicans and Democrats over the idea of cutting taxes. Naturally, no candidate wants to be branded as the one who wishes to raise taxes. Unfortunately, as with many political debates, the debate over taxes has missed some fundamental economic issues that must be confronted and accounted for before taxes can even be addressed.

Thus, since I am not running for public office, I have the luxury and the opportunity to attempt to address these issues that I feel are so important. These issues include budget deficits, trade deficits, monetary policy and, finally, tax policy. I hope I can be informative and enlightening on these difficult issues in this short article — so wish me luck.

Everyone who has ever had to take out a loan knows that the budget deficit presents a huge problem for America at this time. Debt for a long-term investment, like your education, can be good. But debt that balloons out of control is bad news. Why? Well the debt of the federal government is bad for several reasons.

First of all, the debt must be financed by issuing securities like bonds from the treasury, printing money or raising taxes. I will only address issuing securities, since it is what our government does most of the time. If American lenders buy up these securities, then that absorbs money they could have lent to other companies. The result is that as the government deficit increases and crowds out the market for loans, you have to pay a higher interest rate on loans.

If Americans don’t buy up the debt, the foreign countries do. What results from this? Not only do foreign countries become our bankers, but when their securities mature, they are capable of purchasing assets in the United States that were originally American-owned. Profits from these companies can then go overseas and be taken out of our economy.

Next I would like to discuss the trade deficit. It is a well-known fact that the United States imports more than it exports. What does this mean? Purchasing goods from overseas means we have to use the money of the foreign country. If we want their money more than they want ours, then our money is worth less than theirs. Thus, a trade deficit puts pressure on our dollar to devalue.

Now, it is natural for the dollar to fluctuate up and down throughout time. However, if it drops substantially relative to other countries very quickly, then Americans see a real decrease in purchasing power. This decline in the dollar hits you at places such as the gas pump, where the gas we import from overseas costs more because the dollar is worth less. Finally, the dollars we send overseas to purchase these goods do not just stay outside the country. Like with the debt, this money is often used once again to purchase American assets.

Now I will briefly consider the monetary policy of the Federal Reserve. In weaker economic times such as today, the Federal Reserve will strive to cut interest rates in order to help the economy. They have been doing this throughout the year. The problem we face arises from our double budget and trade deficit. The Federal Reserve lowers the interest rate by increasing the money supply. But our budget deficit is driving up interest rates, and our trade deficit is already hurting the dollar. Thus, while these two problems remain, our monetary policy might not be of much help.

Finally, I want to discuss what this means for tax policy. I don’t want anyone to think I am a doom-and-gloom person. There is a way out of this. The first thing that must be done is to get the national debt under control. How can this be done? Three ways: raise taxes, cut government spending or do both. This is where my bias comes in; and I will warn you that I sympathize with Senator Barack Obama and the Democrats. I think we need to do both.

In the past seven years we have cut taxes and increased government spending, which is similar to you taking a cut in pay and deciding you can spend more. It is simply unworkable. We need to increase taxes and decrease government spending so we can pay down the debt. More tax cuts definitely aren’t the answer, because that will only enlarge the deficit without spending cuts, and I’ve already detailed how the growing national debt hurts you and the economy. The hope behind more tax cuts is that they will stimulate the economy, and if income grows, then the government will take in more tax revenue. But if the economy is slumping, as it is now, and spending doesn’t change, the policy would be a disaster.

Why don’t we just cut spending then? This is a possibility, but you can expect a big fight in Congress over where spending should be cut. Do we cut Social Security? Medicare? Veterans benefits? Subsidies for farmers? Defense spending? Education? Somebody must lose money. Just like no politician wants to raise your taxes, no politician wants to take your benefits away either.

You don’t have to agree with me. But I hope I’ve shown that the debate is more complicated than just raising or lowering taxes.

Derek Mobley wants a car in every garage and a chicken in every pot.

This articled appeared in The Dispatch.