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Consequences and Trade-offs

Dec 07, 2009 | By: Mr_Blue | Tags: economy, federal debt, budget deficit

When I was growing up I was taught that there are consequences to our actions - good and bad. Later in life I learned there are trade-offs - I got married to a beautiful woman but I sacrificed an opportunity to travel to Geneva, Switzerland for free the summer I got married. Economics and finance are no different. There are consequences and trade-offs in both. The problem is do our policymakers in Washington understand this.

We were told during the Reagan years and beyond that tax cuts pay for themselves. Well, they don’t - they cost money particularly in the form of less tax revenue collected. Then of course when you have more tax cuts and you have to pay for 2 wars - the consequences and trade-offs are huge. One major consequence of these tax cuts is that federal budget deficit grows and these deficits have to finance with more federal debt. This graph below shows the federal debt levels as percentage of GDP (by president).

Source: Z Facts

The trade-offs: it limits the government’s other spending priorities and its ability to address downturns in the economy (I am a Keynesian) and it increases the debt burden for future generations.

The current big policy debate in Washington is about job creation and what the government should do, if anything, about job creation. The consequences and trade-offs in this debate are absolutely important to understand. Here are just a few regarding government’s efforts to promote job creation:

Good Consequences:

1) Put people back to work.
2) Employed people pay income tax - tax revenue should increase.
3) Employed people have money to spend - economy grows (after all our economy still consists of over 70% spending)

Bad Consequences:

It cost money and likely to add to federal deficit and increase federal debt in the short term (but economic growth and proper fiscal policy can do wonders to lower deficit and federal debt).

Trade-offs:

Put people back to work now and thereby increase economic growth versus the program cost of doing so OR doing nothing.

Obviously this is a very simple version of consequences and trade-offs and is offered as a source of thought and debate. The problem we face right now is that the private sector is not generating jobs. The cost of doing nothing or not enough may be very destructive in the long term. Long term unemployment has a way of decreasing the skills of workers, increasing societal costs and lowering living standards.

Good luck.