Government Spending and You

- A Brief Essay on Taxes and Spending -

This page was last updated on Thursday, January 16, 2014

GDP = GNP - Net Foreign Income

The Gross National Product (GNP) is simply the total value of goods and services produced by residents of a nation during a specified period (such as a year). So the gross domestic product does not include income earned abroad.

Some authors have stated that the propensity to spend, as part of the Gross Domestic Product (GDP), has been about 66% for years. The problem is that the key word in this equation is ‘propensity’ meaning the inclination to do something such as saving or spending. This is an artificial figure (a guess) because no one really knows how much that people are inclined to spend or save each year.

So ‘propensity’ can also mean the inclination not to do something such as to spend or save. If a person’s money is going to be worth less tomorrow than today, a person would be more likely to spend it today. On the other hand, if a person’s money is going to be worth more tomorrow, then that person would be more likely to save it today.

However, when the government sees that wealth, it wants to spend it. The cost of living and the national debt goes up while the ability to save goes down. Lowering taxes for the rich is a poor way to reach national financial stability because the rich already have more money than most people. This means that the rich can spend a smaller portion of their income to get what they need or want. The problem with this is that by the time the wealth has trickled down, the road to prosperity has become a dry wash.

How does Propensity Works

For an example, a monthly expenditure of $10,200 is 20.4% of $50,000 but $10,200 is only 10.2% of $100,000. So in this instance, the propensity to spend (inclination or choice) is not dependent on how much money a person spends. The availability of funds and cost of housing, employment, goods, and services governs this propensity to spend. In other words, 100% of zero is zero but 1% of 100,000 is a far better ($1,000). That is how the principle of the propensity to spend works, it is based on the availability of money and goods and services.

The higher the income the lower the propensity to spend. The lower the income, the higher the propensity to spend. So the less income someone has, the more likely that they will spend more of it. So if the government wants people to spend money, they should place the money in the hands of those with lower incomes and hope that they will use it. It was not so long ago that most people updated the yearly tax withholding to insure that they would not have to pay more taxes. This would give them an unexpected windfall in the following year. So, in a sense, the taxpayers were giving the government an interest free loan of their money. This did not always work as expected because Congress was always looking for new ways to fleece the ‘little’ people while creating loopholes for the wealthy.

Most taxpayers cannot afford or buy quality bonds and securities because the holder previously sold them. It is much like going to a shop and buying a special item, only to discover that the shop sold that item to another because they had special influence (pull). That is the reason that people had hated banks and ‘savings and lone associations’ (and perhaps still do). These institutions are in the business of fleecing the flock while offering exclusive opportunities for their rich investors while swindling all others.

The Fallacies of Spending Incentives

I took a walk only a few days ago in what was once a typical neighborhood in Vallejo. I found that owners abandoned about one in six homes, uninhabited, and required repair. These were homes where people once lived and now they had moved elsewhere. The problem was that the banks were offering low-cost loans that were based on the homeowner’s equity and this lead to ‘creative financing’, foreclosures, and bankruptcies. The lenders stole from the average Jill and Joe and gave the profits to the rich.

So the $300.00 in spending incentives did not amount to much for most people. What it did do was to raise the taxes paid by low income taxpayers. That, in turn, raised the cost of living and that left them with less disposable income than they had before. What was worse, was that they could not give it back. So taxes and inflation have raised the cost of living while decreasing the value and the affordability of empty housing in many parts of the country.

The only people who benefitted from this were those who had money in sufficient amounts to make a difference and they did not need an economic stimulus. This nation cannot continue to spend an obscene amount of money on foreign wars and misadventures. The reason for this is that wars divert current savings into future debts through spending and taxation. War has never been a zero-sum option and the human cost is staggering.

Notable Deficits

The idea of viewing deficits as some percentage of the Gross Domestic Product is not new. In fact, the proposal to collect GDP data occurred about 1930. So no reliable way of comparing economic periods that occurred before then is available. The largest peacetime deficit occurred during the Reagan administration when the President and Congress decided to end the Cold War by outspending the former Soviet Union and its allies.  Reagan did ask for the line item veto but he did not get it because Congress controls taxation and spending giving that up was not ready. So the expected ‘peace dividend’ did not occur because of the Persian Gulf wars (1991 and 2003). Nevertheless, the Clinton administration managed to produce a balanced budget in that period.

Major companies have been shifting jobs to other countries for years. Prohibiting the exportation of new technology can solve this problem. We should not allow A company to make a profit and receive tax breaks for exporting jobs to other countries. Those jobs belong here in this country and without the technology and the cheap labor, those companies cannot be profitable. We should not allow any company to receive tax breaks to make a profit for things that do not work at the expense of our citizens.

Everybody knows about inflation. It is simply a process where money loses its value. However, inflation is a rise in prices due to an increased volume of credit and money. The problem is that ‘pump priming’ depends on private and government expenditures to induce a self-sustaining expansion of economic activity. President George W. Bush (2001-2009) tried to disguise a tax rebate as a tax cut to ‘prime’ the economy but it did not work. It was taking money out of people’s income and savings and giving it to the rich. That is how the rich get richer by doing nothing except clipping coupons or whatever they call it now. No one can truly balance a present budget if they have to pay the previous budgets’ debt. If Congress did not allow it, we would not have a national debt of its present size. On Thursday, January 16, 2014, the Times-Herald reported that the House of Representatives has approved a $1.1 trillion dollar budget.

Edward Steven Nunes