A Blog Called Hope

I think it would be wise for Governor Carcieri to reconsider his plans to slash government spending on social programs.  While it’s heart-warming to hear the Governor talk about no new tax increases, and that we’re “already too highly taxed,” it’s foolish if Rhode Island is expected to overcome the budget deficit, especially in the current recessionary period when revenues from personal income taxes are shrinking.  Much of the current economic hardships facing the state are due to the slowdown in the economy.

I invite Governor Carcieri to read a report written during the last recession by Peter Orszag and Joseph Stiglitz.  The report essentially reads that given the two options of cutting spending or raising taxes, the latter option is the least harmful for the economy during recessions.  

The reasoning is pretty straight-forward, although anathema to Republican thought.  Basically, everything is dependent on an individual’s propensity to consume.  And as Americans, we all love to spend our money on stuff!  A reduction in government spending on goods and services will reduce consumption by exactly the same amount.  For every dollar that the government does not spend, the economy does not generate that economic activity.  Conversely, if taxes are increased by $1, there may be a drop in consumption by 90 cents while savings is reduced by 10 cents.  This scenario is less harmful to the economy that the former. 

A cut in social welfare spending will not only harm those who are economically disadvantaged, it will harm the entire Rhode Island economy more than an increase in taxes.  This is due to the aforementioned propensity to consume.  Additionally, while some of us spend all or most of our money, there are others who spend only some of it and save the rest of it.  An extra dollar of income is relatively less valuable for someone making over $200,000 a year than it is for an individual making $11.50 an hour.  Individuals with fewer dollars to spend a month are more likely to spend more of their dollars than are those with much greater resources.  The wealthier are much more likely to save a larger proportion of their income, so the additional impact on the economy would be compounded by their savings rate.  As those in the lower economic brackets see larger reductions in their benefits, the economic impact would be much more profound than a tax increase on those with high economic resources would be.

I know everyone hates taxes, but a longer and more destructive recession would be much worse.

This entry was posted on Sunday, January 27th, 2008 at 10:47 pm and is filed under Budget, Economy, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.