President Obama in the State of the union address introduced what he
called investments, or tax incentives intended to promote economic
growth. He spoke of "investment in American technology, education
and infrastructure - our Sputnik moment as he called it. Republicans
countered the president's investment by saying it simply is a euphemism
for more spending.
Investment does mean spending but the hope is for a future reward and
a future benefit. All spending is not bad - - what is sorely needed by the
government is SMART spending. This will require a great deal of analysis
and a total restructuring of the existing budget to attempt to bring it into
balance and carefully decide where America needs to reduce, eliminate or
contain our expense outflows. It has become more than a balancing act.
This implies that the budget has been in balance recently. President
Omaba's job is confounded by the fact that the budget has been so grossly
over inflated and ignored for so many year that it will take a great deal of
time to analyze, correct and control.
Economists sometimes lose sight of the fact that we are not starting at the
baseline. The budget is already out of balance. Many of the policies they
discuss are paramount and necessary once the budget has been brought
back to some sense of normality and affordability.
Sometimes we are confronted with contradictions when prudent economic
behavior from the standpoint of an individual or business is applied at a
macro level. The Thrift paradox is an example of that. Saving for an
individual may provide benefits to the individual but if everybody saves
the economy may implode. While this may theoretically be true, it is
implausible to think that all of society will continually do that. People
have specific goals and those goals require spending - -just like
investment in America.
The most important insight from economics is that people respond to
incentives. From a governmental prospective those incentives must be
carefully alligned with their intended outcome. For example, if you want
employers to hire more people, give them some type of benefit for doing
so. A tax credit, adjustment or some other monetary incentive. If
investment in business is encouraged, decrease the captial gains rate.
These incentives that are necessitated by the economic climate must also
be built into the budget.
This is nothing new. The big challenge that remains is how to balance
the budget while working in the incentives like getting people back to
work. Balancing the budget will be difficult especially in deciding where
to cut and eliminate. Incentive considerations are key to coupling the
budget with economic realities and providing a sound financial future
for all Americans.
