Austerity Plan

The inner need to look at an issue from another angle (and my friend Jeff's comments) has brought me to another post where I critique myself - as there were a few inconsistencies that need to be clarified.

1. When you increase taxes you are then taking money out of peoples pockets and therefore they have less to spend. They are then not able to buy that flat-screen TV (or at least need to delay it) - then that TV salesman is unable to get a new laptop… As I said in my original post: "GDP will go down."

2. When you decrease spending you are then taking money out of government employees pockets, and, following the same argument as above, taking money out of the system. Once again "GDP will go down."

"GDP will go down." The austerity plan of increasing taxes and decreasing spending will both make GDP decrease. The potential problem would then be as follows: now since everyone earns and spends less money the government collects less taxes (from incomes, goods purchased, etc.) despite the higher tax percentage (no longer assuming that GDP is constant). How much less is debatable - they could actually collect less, or more, or the exact same amount depending on the types of changes made.

I left out the specifics. I didn’t specify how much to increase taxes or who, in our variable tax system, to increase it to (Big or small businesses? Rich or poor people?). I also didn't specify which public services to decrease or how much. I suppose I would leave that to the bickering politics.

Are we at the happy medium in tax rates and public spending? To suppose that we are at the most optimal level of taxes is preposterous. These rates are determined by bickering lawyers turned politicians, NOT economists (to quote Jeff: "I think Democrats will eternally believe we are below that happy medium and Republicans will believe that we are above it."). Because of this, my proposed austerity plan would be whittled down to its bare bones. Perhaps those bones would have enough impact to make a significant impact on the national debt (but still unlikely).

NPR did a follow-up (think rebuttal) story. In it a Mark Blyth, of Brown University, argues that increasing taxes is too hard - so the more likely route for the austerity plan is to decrease public spending. By his logic, this will affect the lower income citizens more (as they use a proportionally larger amount of public services). I do agree with his logic. See the article here.