Commentary: It's the Growth Rate, Stupid
Buffalo, NY – In the past we have complimented James Carville, the "raging Cajun" political advisor to then presidential candidate Bill Clinton, for crystallizing the campaign strategy for candidate Clinton in the phrase, "It's the economy, stupid!" This insight was not only pithy, but it was correct, and served as a guidepost during the two terms of the Clinton Administration.
Well, we are back with another Democratic Administration and there is a growing consternation among the electorate about the massive actions the government is taking to deal with the crisis that continues to grip our financial system, as well as the overall economy. There is a growing consensus that at a time like this, the government is truly the lender of last resort. Remember that governments across the globe are enacting the same types of programs that we are in the U.S.
However, we are a bit different in that the U.S. has the largest economy in the world, and by extension, has to take some of the most dramatic steps to get our economic engine restarted. The concerns that are growing among citizens of every political stripe deal with the consequences of the actions, rather than the actions themselves. Of course there is some grousing about what gets why and why. There is also consternation about offering too much help to municipalities to the point where they are not taking the steps to economize, that they otherwise would have to take if the stimulus aid were not so forthcoming. While all of this may very well be true, it is important to focus on the largest question of them all, "how will we ever pay for all of this "stimulus?"
Many people choose to entirely skirt the question and state that we are burdening their grandchildren. The assumption is that nothing in the present can change and we are just kicking the can down the road for someone else in this case future generations to pay the bills for our lack of foresight and unwillingness to regulate our financial system. However, this really begs the question.
Others believe that the answer lies in cutting taxes for 95% of the population and having the remaining 5% close the gap along with a restructuring of 16% of our GDP (health care) as well as imposing additional energy taxes. We can state with a reasonable degree of certainty that it is not possible to tax our way out of this predicament. There is not enough income available in America to be able to tax ourselves to prosperity. As you may have heard us say in the past, the power to tax is the power to destroy. As denizens of western New York, we have a close up appreciation of the truth of that quote. So we have examined two alternatives that are unpalatable: send the bill to our kids, or tax ourselves into oblivion. Is there a third alternative? Yes there is: it is to enact tax policies that promote growth of the economy, rather than punitive tax rates. In other words, the only viable way to pay for all of this government borrowing is to try to grow our way out of this slump.
The most proactive means of accomplishing this goal is to measure any tax proposal not by how much tax it will purportedly raise, but by what it will do to stimulate the economy. Realize that higher tax rates will do nothing about restoring the 5 million jobs that have been destroyed by this very severe economic downturn. Only tax policies that are stimulative to the economy can help to expand the tax base, thereby generating greater tax revenues.
So the answer to how we will pay for all of this stimulus comes down to tax policy. Will we as a nation encourage growth policies that will allow an expanding GDP to cover the costs of our past indiscretions, or will we embrace punitive tax rates and the politics of envy? America has always been pro growth; shouldn't our tax code?
Listener-commentator Anthony Ogorek is principal of Ogorek Wealth Management in Williamsville.
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