It is a principle of economics that for every export there must be an import. That is, if the U.S. exports a million cars, then other nations have imported a million cars. Our exports are their imports. They are opposite sides of the same coin.
There is a similar relationship between income and spending. One person's or institution's (a business, church or level of government) spending is another person's or institution's income.
Thus, income is derived from the spending done by other people or institutions. For example, a self-employed dance teacher or beautician gets their income from others' spending. Those employed by corporations get their income from that corporation's spending. Obviously, the government employees at Hill or the IRS get their income from government spending.
Because one person's income and another person's spending are opposite sides of the same coin, if there is reduction of spending then there is necessarily a reduction of income to someone. Understanding that fact is the key to seeing that austerity or reduced spending by individuals, businesses, or local, state or national governments, will necessarily mean that people's incomes will be reduced.
Thus, those who advocate a national balanced budget are advocating shrinking incomes for tens of millions of Americans. Those with diminished incomes will diminish their spending -- they will eat out less often, buy fewer goods and services and give less to charity. This will further shrink the economy.
Would it hurt the economy if all incomes and prices fell proportionately; for example if they were all cut in half? Yes. Such a fall in the price level would indicate deflation or a continuing decline in the general price level. Deflation creates economic stagnation, for no rational person, in a deflationary environment, will buy a home, car or anything else they can postpone until tomorrow. Why would a person buy a home today if they expect it will be cheaper tomorrow? Deflation reduces spending and that reduces incomes and kills jobs. Conversely, if people expect modest inflation they will buy all or more than they can afford because inflation benefits debtors.
As a debtor, our government prefers slight inflation to deflation. But there is an additional reason our government will fight deflation. Deflation creates unemployment and each percent of unemployment adds $90 billion to our deficit because the unemployed do not give the government revenue but they do cost the government in various welfare payments. Whereas our unemployment rate has been between 9 percent and 10 percent and we have millions of discouraged workers and underemployed workers who are not counted, it is likely that our unemployment problems are adding $1 trillion to the deficit this year.
Although Harpers index states that 38 percent of the last years' deficits were due to invasions Bush initiated and the Bush stimulus -- better known as the Bush tax cut -- the big reason the deficit has exploded the last few years is the recession and unemployment, which cost the government hundreds of billions more annually.
Government spending to combat recessions causes recessions to be less severe. One reason the Great Depression was so severe was that President Roosevelt's deficit spending, which provided incomes to millions, was counteracted by states' austerity, cutting incomes to millions. The governors' austerity undermined the prosperity Roosevelt was creating.
Anyone doubting that "spending equals income" might perform a simple survey. Ask all the business owners you know: "Will you be better off if the public, including your customers, become more miserly, tight-fisted and stingy?" The fact is businesses profit from people spending, even if their customers' extravagant purchases are made with borrowed money.
Some regard China as a nation that has benefited from practicing austerity. But China has had to rely on other nations' spending, especially the U.S., to get its incomes.
If other nations had not purchased its merchandise, given that so many of China's residents are so poor and underpaid, who would China have sold it to?
"Spending cuts" are a euphemism for "income cuts." And income cuts presage economic stagnation.
If anyone can imagine a plan for people to get income without other people or institutions spending the whole world would love to hear about it.
Jones lives in West Haven.
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