Prof.H at Fluxlife
In the recent history since the Reagan Presidency, the idea of a balanced government budget has become a mantra to some. Indeed, increasing debt burdens coupled with unfavorable interest rates can, eventually, become a drag on the economy if the growth of the debt rapidly outruns the growth of the economy. However, to regard the concept of a balanced budget as an imperative is inane and far more harmful to the economy than the debt that it seeks to avoid.
Government spending is a significant portion of the overall spending in the economy, and it is essential to a healthy economy and society. If there is any one lesson that we must learn from our current economic crisis, it is that it is spending in the economy that is the primary factor that drives and sustains the economy. Consumer spending is the most important engine for the economy, but government spending is the next most important. If government spending contracts even as consumer spending contracts, the entire economy falls and even collapses.
Balanced Budget Politics must be replaced by Stable Budget Politics if there is to be any hope of tempering future economic volatility. It must occur at both State and Federal levels.
Stable Budget Politics works something like this: A SURPLUS (revenue) budget must be required during times of economic boom, where the economy grows substantially in a given year; a BALANCED budget must be required during times of moderate growth; and, a DEFICIT budget must be maintained during times of near-zero economic growth or economic contraction. Overall, the goal must remain that during economic contractions, government spending either remains stable or actually increases.
There are a great many and substantial details involved in implementing and executing Stable Budget principles, and this is a mere conceptual overview. It is, however, a concept that needs a whole lot more attention.
One of California's problems appears to be that it engaged in large-scale deficit spending even during times of tremendous economic boom, leaving it still carrying large debts when it should have been bankrolling its savings accounts. Consequently, when the economy went sour, California's economic position was gravely disadvantaged. Coupled with the credit crunch, California found itself unable to increase its borrowing, and it's ability to maintain even basic governmental functions has become jeopardized.
Unlike most states, California's state economy is of a scale on par with the largest national economies in the world. Small and rural states, entering the recession equally disadvantaged, would be in even worse shape, but state spending remains important in those states. Consequently, what the Federal government needs to do is provide direct lending to states employing Stable Budget principles at a low 1% or less interest rate during any period where deficit spending is dictated by those principles.
Stable Budget spending principles can be implemented immediately, and they can help the current economy recover. However, their greatest value to society is that they will substantially reduce future economic instability and help prevent and minimize future economic recessions. Had they been instituted two decades ago, California's current budget crisis would not exist, and the last threads of the state's entire economy would not be hanging in the balance.
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fluxlife technorati tag(s): budget politics - Reagan Presidency - California's Economy - economy - fluxlife