Crowding Out

This is a response to a message from a forum I frequent. I’m glad with the way a couple of the points came out, so I thought it would warrent reposting in the economic category here.

Republican – greed, Democratic – opportunity for ALL economic levels

I strongly disagree with incredibly broad misinterpretation of our nation’s political landscape. Unfortunately though, I’m going to respond with another generalization. As a party, the ideological trend is for Democrats to prefer larger government and social (socialist) programs to redistribute wealth taken in through taxes. People complain that Republicans are greedy, or heartless and cut spending for this and that, but what they’re really doing is trying to decrease our nations massive debt and lower taxes, which means less of a burden on your pocket and on future generations. Miasdad made the great point that no country has succeeded with the government trying to control the economic factors of production or distribution. When they (Republicans) cut subsidies for, say, green clay pottery makers, they do two very important things (really two parts of the same thing). Lower spending can mean lower taxes, and paying down of some of the debt; the interest on the debt alone takes a significant portion of every dollar you give to the government. Much more importantly is the effect it will have on the bond market, through crowding out.

Explained very simply, if you’re Joe Bank and have a big wad of money to lend to someone, you can either give it to to a company or the government. The government has never defaulted on a debt, so you know you’re going to get your money back. To attract capital corporations are forced to offer bonds at lower prices/higher yields, because a component of interest rates is risk. So in effect the government is crowding out private investment. Entrepreneurship is what drives this country, and personally I would rather have the free market deciding where the money should go, rather than some politician. Because the borrowed money is costing the corporations more that’s less money they have less to invest, create jobs, and give money to workers who just may go out and buy green clay pottery. Republicans believe that the ultimate economic cost of the crowding out effect negates (to varying degrees, depending on who you ask) whatever benefits you may have gotten from the government spending.

Now you may ask why people like George W. Bush and Ronald Reagan spend money out the wazoo, and so do I, but the reason is that strong defense is a prerequisite for sustained economic growth. People will not invest and the economy itself cannot function when there is not security. That’s why, though I cringe when I see the numbers, I recognize the need for recent increases in defense spending.

People also say that Republicans only want tax cuts for the rich, and that every measure they propose is biased towards covering their rich butts. Well, the wealthiest 15% of our country pays 90% of all taxes, so any broad tax cut is going to seem biased towards the rich simply by definition. Furthermore, many would argue that, paradoxically, lowering taxes is actually the best way to get rid of our debt. How? Because less money being wasted by the government and more money in the private markets means higher productivity and growth, and when that’s combined with fiscal responsibility, that means we could grow out our debt with low taxes, the same programs we have now, and higher GDP for the country. Everybody wins.

One reply on “Crowding Out”

  1. comment
    Yes but then there is the question of direction of growth. You believe that the invisible hand will cure all. Do you ever question why Britany Spears sells so many albums, her charm? No because much of consumer spending is impulsive and irrational not to mention guided by advertising/retailers. When the government increases spending and funnels it into social programs than at least there are highly trained people and investigations into how the funding should be spent. These people ruminate for many hours at our expense to find solutions to problems that affect us all. I do not agree that government should have absolute control but I would rather them than media and advertisers having control.

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