Monday, January 17, 2011

Cut Everything Except Seeding for the Future.

Now for a somewhat political statement - I don't make many of them here.

As we all are aware, many countries have experienced large reductions of government income due to the recent near-global recession. Now, although I do appreciate that 'stimulus' measures can be effective, and I don't pretend to master the fine art of recession economics, it does seem to my simplistic mind that income reduction should be accompanied by reductions in government spending.

So the question would be where to make the cuts? Well, in this question I tend to think like an average household might. An average household would cut down on the luxuries while keeping the essentials, and would shore up their financial situation for the future. So that's why, for example, I don't think government tax incentives to encourage spending on luxury items makes sense when you're trying to stimulate a healthy recovery. It might indeed help lead in the short term to economic activity and an increase in GDP/employment etc, but in the longer term it would just increase debt.

So cuts need to be made in spending that does not promote economic growth. This, in the US, should include the big three: social security, medicare/medicaid and the military, which together make up the majority of federal spending. As for entitlement spending, certainly truly disadvantaged citizens need help to remain healthy and get back on their feet, and I'm aware that federal money spent in these fields is indeed immediately ploughed back into the economy, but this money arguably does not stimulate longer-term growth. We need to think creatively of ways of maintaining and improving entitlement care without throwing $1.2 trillion per year of federal money at it. For example, how to get more, healthier food on the tables of the hungry while spending less doing so.

We need to cut social security benefits and/or raise the age of full entitlement. And what was the point of the recent reduction in the social security payroll tax without transparent concomitant recalibration of the benefits received in future years? Live now, pay later.

The US medical system, which is one of the least effective and least fair among developed nations, needs to be revamped including (i) coverage for all, (ii) controlling costs and (iii) more competition. The system existing until now has been effective in none of the above. The recent healthcare act goes towards (i) without significantly tackling (ii) and (iii). Phil Bredesen's recent book "Fresh Medicine" describes how to do all three.

As for the military, in my opinion most of the wars fought by NATO countries since WWII have been at best ineffective and at worst disasters, and, by the way, have also done little to enhance economic influence. The Afghan and Iraq wars have wasted trillions. Certainly, our nuclear deterrent needs to be maintained, although we should continually work assiduously towards multilateral reduction. Also, of course any existing threats to Western society must be tackled, but this in an effective, and cost-effective, way: the present, dumb, invasion-based attempts at doing this have proven useless and painfully expensive.

So, it's across the board cuts, then, is it? Well, no. Government investment that is likely to produce clear economic return should be maintained. This means education, science and technology. Now, some people think that the government should keep out of anything to do with R and D - market forces will create the demand, stimulating private research. But the problem is that the financial system is skewed towards short-term gain, so private investment does not represent the longer-term wishes of the people. The result of this is that we are failing on counts that are of prime importance to us and our families. Why, for example, do we we spend $900 billion per year on the military but $5bn on cancer research funding? Think of the relative suffering families endure at the hands of foreign foes relative to disease. Admittedly in 1940 we had to put everything we had into defending our patch. But, today, are we really 200 times more scared of the Taliban than cancer? I wrote at length about this in a previous blog entry, and to some extent this paragraph simply reflects what was written there. Science and technology are the way forward for the military as well, and in protection against terrorist attacks. In this the British government has led the way in recently proposing huge cuts in government spending while ringfencing science.

As for raising taxes? Certainly: in one way or another for those who got us into the mess in the first place, ranging from those responsible for extreme leveraging in certain banks right on down to the many individuals who borrowed too much. For the rest of us? Well, even if we don't feel responsible for the sub-prime crisis and ensuing debacle, maybe we should all chip in a bit. Higher taxes temporarily to get the deficit down subject to the condition that spending be also reduced.
Maybe economists would crucify this concept, but it is, in a way, what an average household would do.

Finally, will any of the above happen? No. I can't actually see any of it happening at all. None of it. Can you?

1 comment:

  1. With Rand Paul, a star of the Tea Party, basically saying to the DOE "off with your head", I think that funding in the near future may be in jeopardy. What a way to shoot oneself in the foot... I was however reading in "USA today" that the majority of the American population thinks that the US can keep its dominance in the decades to come thanks to Science and Engineering (obviously not the same people that vote some of these congressmen in).