Sunday, December 30, 2012

The Painless Way To Reduce Budget Deficits Is To Decrease The Unemployment Rate

We are being told by very serious people that we must inflict pain on ourselves to save the nation from future bankruptcy.  We all know that medicine only works when it it tastes bad, or when it is painful, therefore; common sense tells us that we should get ready for a dose of pain.  This article suggests that we have already endured the pain. Cuts in private spending, or belt tightening, is painful and we have done that.  Our national savings rate has doubled during our current recovery.  Now we are being told that more pain is needed before we can be redeemed for our sins.  That is, government spending on entitlements must be cut as well.  That is we should do what Japan did to deal with budget deficits and cut federal spending.  That would be a good idea if we want the same result that Japan got from its austerity program.  The pain was real but their economy got worse.

The article provides several graphs which point us in the direction that we should be taking, and does not require painful medicine. The correlation between the unemployment rate and federal budget deficits is remarkably high. The best way to reduce budget deficits may be to create jobs for the unemployed.

Another form of medicine that is being proposed is also painful for those with high incomes. Raising their taxes is painful, but it won't do much to reduce budget deficits.  If we want to reduce growing income inequality, we should make the tax system more progressive, but it is not a good solution for reducing budget deficits.

We tend to lump Social Security along with Medicare and Medicaid when we talk about entitlement reform. We would be better off if we focused on the real driver of future increases in government spending.  It is healthcare price inflation.  That rate has been slowing down in the last three years and that is good sign. The Affordable Healthcare Act may slow the price inflation rate as well.  In any case, reducing healthcare price inflation should receive most of our attention.

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