“Whether the stone hits the pitcher, or the pitcher hits the stone, it’s bad for the pitcher.”
Man of La Mancha
I have been thinking about the political adage: “It’s not the revenue, it’s the spending”.
The more I look at that statement, the more I have trouble understanding it. Why?
Let’s think about a manufacturing company. It makes something that the country needs, so the Federal Government believes that it is important the company succeeds. In an economic environment in which that company sees potential struggles to keep employees and customers, it may face specific financial challenges.
The government would like to help that company, preserving the employee’s jobs, supporting the community and protecting American manufacturing. How does the government do that? There are basically two options. One way would be to grant funds (subsidies) to that company (or all companies in that manufacturing space) with the intent to support retooling, or research, or energy use, etc. Subsidies increase the government’s “spending” as the funds are directly given to the company. The other way would be for the government to provide tax relief to that company, say, by crediting deductions for retooling, or research or energy use, etc. That would be a tax cut, thus reducing “revenue”.
In either case the company receives the same financial support, but in one case it gets recorded under “spending”, and in the other it gets recorded under “revenue”. And in either case, the government nets out the same dollars (either given or not received).
It would seem to me that when you have a pool of assets, and you reduce that pool either by giving money to someone else, or by forgiving the deposit of monies due, you are, in effect, using your assets.
Tax cuts to the general public would follow the same logic. If you provide tax rebates to people who are in the lower deciles of household income, you are increasing “spending”. But if you give tax breaks to those in the upper deciles of household income, you are reducing “revenues”. The problem with this type of analogy is that you can’t really reverse it. Because the lower decile households fall below the federal tax minimums, it is difficult to give them tax cuts (decreased revenue), while it is equally difficult to give the upper deciles tax rebates (spending).
We usually think about the Federal Government using our own household experiences as a model. If our incomes are insufficient to pay for those things we want to have, then we have to either find a way to increase our income or cut back on our spending. Simple. Our revenue needs to balance against our spending.
But Federal Economics is not like our Home Economics. The Federal Government has chosen to allot certain amounts of the monies received to programs designed to help, promote, or advantage historical priorities identified by the current and/or prior administrations. The distribution of these assets is adjustable.
The Federal Government also has chosen to assess the population for the monies necessary to fund these priorities. These assessments of the public are also adjustable.
And the biggest difference is that the Government can print more money if expenditures exceed deposits.
FUNDS ARE EITHER PROVIDED TO OR FORGIVEN FROM PEOPLE
Perhaps a better way to look at the economics of the Federal Government is to use a term like “provides”. If we provide support for people who need goods or services, we deliver our assets directly to them; but if we provide support for people by reducing their taxes so that they can purchase those same goods and services with their own assets freed up by the tax reduction, we reduce our assets indirectly.
But in both cases the governmental assets are reduced equally, whether you measure the assets as funds in hand, or the assets as taxes given back to the payers.
It is undeniably true that the two sides of the Federal Economics equation are unequal. On one side we have commitments for funds that are greater than the other side in which we have funds received. The challenge is how to balance those two sides of the equation. Spending our assets by providing tax cuts will not balance this equation.
We can spend our assets indirectly by reducing tax revenue or we can reduce the “spend” on tax cuts.
HOW THE MATH WORKS
It seems to me that the responsible way to balance the equation is to couple a reduction in distribution of direct assets to a reduction in the distribution of indirect assets.
Look at it this way: In 2025 the Federal government will spend about 23% of the GDP, while it collects about 17% of the GDP. The budget deficit is about 6% of GDP. So, the equation of Federal Economics looks like this:
Outlays – Income = Debt
(23-17=6)
Now, look what happens if you want to balance the equation by just reducing Outlays.
You might think that reducing Outlays by 6% would be sufficient. But that is not how the math actually works.
We would need to reduce Outlays from 23% to 17% and this is a reduction of 26%!
Now, consider what happens if you reduce Outlays by 15% and reduce the credits that reduce incomes by 15% also.
Now Outlays would fall to 19.55% of GDP and Income would rise to 19.55% of GDP. Now the deficit has evaporated.
Can’t we agree on this as a goal?
Whether the direct spend increases the debt, or the indirect spend increases the debt, it’s bad for the debt.