Tax cuts and creating jobs

Presidential contenders are talking a lot of how they can create jobs out of one side of their mouth (including the incumbent) and talking major cuts in government spending out of the other side of their mouth.

It is fantasy to think you can have both.  A recent study that looked at 173 government policy changes  between 1978 and 2009 found that overwhelmingly cutting government led to a drop in GDP and a rise in unemployment (as  summarized in the Economist July 16, p.79).  Beyond the data it is simple common sense.  Cutting government means depriving businesses of contracts, and employees of jobs.  If you are need to do it you do it in a healthy economy, not an ailing economy.

Major cuts in government spending seem imminent, maybe as part of a Government debt ceiling deal.  Obama feels raising the debt ceiling is crucial to our good name as a creditor, Republicans have demanded major cuts in exchange, Republicans seem to have won that battle.

If we are lucky the cuts will be spaced over a long period of time, but given the scale of the proposed cuts, there is probably going to be a pretty big hit within the next year or so.

Here is what is going to happen. The cuts in government spending will mean contracts with private companies will be cancelled.  Those companies will lay off the workers they hired to work on that project.  Cuts in government spending mean government workers will be laid off, contributing to few consumer dollars to prop up the economy, and perhaps adding a little fuel to the ongoing foreclosure problem.  In short any cuts in Government spending right now will give a big boost to the possible relapse into recession and higher unemployment.   And next year both Presidential candidates will be pointing the finger of blame at the other for higher unemployment.

I am calendering this blog to revisit it during the heat of primary season next summer - Aug 15, 2012.  If I am wrong, if the economy picks up, I will tip my hat to Republicans.   If I am right I am hoping my Republican friends will acknowledge that maybe the hard core of the Republican party needs to rethink their economic notions a little bit.