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Keeping Track of Entitlement Dollars–A Budget for Economic Growth

January 25, 2013

Keeping Track of Entitlement Dollars

Economic Growth and Productivity

Imagine you are looking through the glass window of a clothes dryer and items are tumbling by. Instead of clothes you see dollars and goods and services. It appears that the dollars are chasing the goods and occasionally a dollar catches a good and it drops from view. Every item in the dryer is something that was produced and is in the market waiting for a buyer. Every dollar has come from work that produced the goods. When a dollar and an item “drop”, space is opened for making a new item and generating another job and dollars for future purchases. The dryer illustrates how an economy works and how growth occurs.

In economic terms the production within a society is the GDP or gross domestic product. This measure attempts to sum up the value of all goods and services provided and sold to domestic and foreign markets. A dynamic economy grows by producing more and more valuable goods and services and selling them.

Increasing worker productivity, more output from less resources, keeps the price below the perceived value so that sales grow in an open market. Person A makes something and sells it to person B who does a service or otherwise has funds to buy from A. The economy grows with more jobs and more money in circulation as high productivity lowers the cost of basic needs and opens opportunity for discretionary spending.

 

Taxation and Government Spending

When the government collects something, a tax, from the productive worker, the worker has less to spend on something else made by another productive worker. The government use of the money may or may not add a productive job.

The government may spend the money for the good of all including the worker, say by building a road, teaching worker skills, adding irrigation systems, and in doing so the government creates a productive job. The added infrastructure can improve productivity and feed a growth cycle. In this case the new job, financed with tax payer money, can have a synergy that lifts many workers and creates jobs. The irrigation project for example may open new farm lands and offer new production at declining cost.

 

Voters in a benevolent society, in which most citizens have income beyond that for basic needs, may approve taxation measures to support disabled or less capable workers so that everyone can have a basic needs standard of living. The implementation of the program can be based on creating “special cash” or vouchers that can be spent on food or housing. For medical care the government may seem to have an open check book to pay for all procedures that the patient and doctor commit to. Better worker health, housing, and nutrition could add more productive workers to the system.

When the government spends money, the economy grows by two forces: 1. Possible higher productivity leads to lower cost to make competitive products for domestic sale or export to world markets, and 2. The government cash flow to the workers puts more dollars in the system chasing goods, raising the domestic demand for goods and driving job creation.

The government may need to spend the tax money “defensively” in a way that does not add to productivity but avoids a downside event— foreign invasion, highway robbers, airport bombings, or a poor folks revolution. In economic terms, every job could be sorted into “productive” or “defensive”. In an imperfect world, the defensive jobs are certainly necessary; however, since nothing new is produced and marketed, they lower the average standard of living relative to jobs which add goods and services. One could argue that the defensive jobs should not count toward the GDP. These defensive jobs do increase money flow, add buyers, and raise demand.

The government may spend money on foreign aid or foreign wars as a protection against loss of world stability and possible loss of trade. These expenditures will not all create US jobs and some of the money spent will leave the circulating system. The money flow out of the system will directly reduce US jobs and lower the average standard of living.

At some point the economy may breakdown when economic growth, the real productivity growth does not raise enough new tax revenue to fund the existing level of government spending. The backup plan is to keep borrowing money. Everyone can still get paid but without a new direction of funds to add productivity, the economy will not magically grow. Borrowing will be a dead end street. 

In summary, all money removed from the system by taxation in the first cycle lowers the standard of living for the individual taxpayer, a productive worker who has less to spend. The recirculation of the tax money to gainful projects can generate increased productivity through investments in better infrastructure or the money can be just handed out for no work-unemployment benefits or vouchers for the poor people. Increased productivity increases the overall standard of living, while re-circulating the collected money for no production supports jobs but lowers the standard of living.

Which Jobs are “Productive”? Running the Legalistic Society

The operators of the legal system, the attorneys, the judges, and all of their facilities are funded from either taxes, insurance payments, or directly from the productive worker. Every dollar for the legal system is taken from the production dollars and effectively spent for “defensive measures” with NO REAL productivity gain. In effect, this “cost of doing business” lowers the standard of living for the whole system, while creating a high standard of living for the best players of the legal system.

In an open market workers will develop their skills to improve their productivity and earn a higher standard of living. Currently, the highest standards of living can flow to the “masters of defensive measures”, who provide protection for the productive workers. Does this seem like a mafia extortion operation? Nothing new is produced by “defensive” workers, but without them the worker’s risks the loss of personal assets is too high to accept. “Pay or I’ll break your face.”

As the legal system drives up the downside risk, the risk of losing all of one’s wealth, the cost of protection increases with an increasing drain on the productivity and the average standard of living.

As an example, the worker wants to have the valued service of a doctor. In a simple market, he would pay a market rate for his care. The best and the brightest would become doctors and be fairly compensated within that market.

In an evolved legal society, the worker must buy insurance because the cost and downside risk have become too high. The doctor buys insurance because the laws create high downside risk for him, too. The productive worker is now paying for the doctor’s productive work plus an assessment of roughly 30% that is funding the insurance and litigation cycle.

When the government is the largest consumer of health care via care for retired workers, care for the poor and the disabled, the taxpayer-worker is now caught in a double cycle. The government as a big buyer is raising demand and driving up cost. This requires more taxes or borrowing to support the citizens who are receiving the health care and to pay the care provider plus the money for legal system protection.   

If this has all been mind boggling, we can return to stare at the clothes dryer. We now see that the green dollars are smaller to buy goods and services which grow the positive production jobs. Some spending is via the special cash. The red dollars are from borrowed money. Some money goes to paying for defensive measures. They are MUST buy items– insurance, police services, local taxes, and legal fees. The economic growth is lower and so the “events of dollars catching goods” are less frequent. The economy, the GDP is barely growing. Tax revenues are falling and only the red borrowed dollars and yellow special cash dollars are keeping it from coming completely to a halt.

Yes, when we look at the present state of the US economy it gets complicated! Back to basics, more dollars chasing more valued goods, has many suggestions for a solution. 1. Cut all taxes, spendable dollars will increase, and by wishful thinking or some kind of economics, the economic growth will create the new tax revenues to avoid more borrowing. 2. Cut some dollars from all areas of government spending to reduce borrowing. 3. Aim spending cuts at programs which pump out cash with no productive work required. 4. Aim spending cuts at defensive programs which add nothing to the GDP and accept the higher risk of a downside event. 5. Attempt some kind of cost control on entitlement dollars. 6. Take a closer look at tax “free riders” and loopholes to add tax revenues and lower borrowing.  

The debate: Path 1 would be great if it worked but borrowed money would be increased as we wait and hope for more jobs.

Combining 1 plus 2 would avoid the added borrowing but the indiscriminant spending cuts would immediately cost jobs and tax revenues.

Spending cuts in 3 and 4 would also shock the system with fewer jobs for government workers/contractors and for the downstream workers whose jobs come from the three kinds of cash flow, green, red, and yellow.

Cost control in 5 has an ugly tone of coercion and market interference. The reality is that the government spending has already altered the free market and is driving up food, housing, and medical costs. Presently, there is no cap on how much can be paid out for medical procedures, or the number of SNAP and housing voucher recipients. In health care, the defensive spending is exceptionally high as the downside risk, the cost of insurance/litigation, has inflated.

Closing loopholes 6 is obvious but the political powers that created the loopholes for themselves may be the hardest to overcome.

In my view, the concept of defensive spending versus spending for productivity improvement is the key to understanding job creation and economic growth. We can broaden of the idea of entitlement to include the second tier cash recipients. The people who receive cash from the SNAP and get direct rent payments do provide value and support many jobs. The doctors and insurers who call the shots on medical procedures for the poor and the elderly and just turn in any and all bills for government payment need to trim the system. If I am poor and old I already have more personal downside risk than the current system is paying for my protection. In all cases, the payments need to match the value of the benefits.

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