Obama to announce deficit reduction cuts ?Bad idea

January 25, 2010 8:29 p.m.

According to CNN President Obama will announce spending restraint measures in an effort to appeal to Republicans, fiscal conservatives, blue dog Democrats and other fiscally conservative independent voters . He is doing so apparently in response to his political defeat in Massachusetts and growing pressure from fiscal conservatives in his inner circle. It is a bad idea and a slippery slope to the hell of cutbacks, slower recovery from the recession and red meat for reactionary political interests in the U.S. It is also not what he got elected to accomplish. There will be and there should be a strong negative reaction from mainstream liberal democrats, the trade unions and community activists who after all are largely responsible through their hard work on the ground for his election in 2008.
In addition in purely economic terms it will not help the recovery and withdraw stimulus from the economy. The amount initially is fairly symbolic rather than substantial but it is the thin edge of the wedge. You can be sure the amount will not appease the Republicans and demands for far greater cuts will quickly materialize.Fiscal conservatism is a bit like poison ivy once you get it it spreads rapidly.

The solution to deficit reduction is to reduce the unemployment rate as swiftly as possible and continue to keep interest rates as low as possible. low interest rates stimulate investment and reduce the burden of the interest payment on the debt.This leads over time to the shrinking of the debt to GDP ratio and a slow down in the rise in the deficit and its eventual shrinking.Remember also that the bulk of the debt, over 70 % of it, is financed domestically and represents a method of channeling domestic savings into domestic investment, a critical function during a slump.

The debt shrinks in relative terms because as the economy begins to grow again the ratio of the debt to GDP stabilizes and then falls.In arithmetic terms the denominator, the GDP, grows faster than the numerator , the mass of debt. This is because as job losses end and new jobs are created and rehiring begins, unemployment shrinks, and   government expenditures to support the unemployed also falls and the newly employed formerly unemployed people now pay taxes to governments.Hence revenues rise, expenditures shrink and deficits fall.

There is no reason in this 10 % unemployment economy to focus on deficit reduction through budget cuts which can only slow the reduction in the unemployment rate. There is however every reason to focus on stimulus, employment generation and building entrepreneurial animal spirits to undertake new employment generating investments.Cutting government expenditures accomplishes none of this.