Small Matters: Cutting spending, taxes ... and uncertainty

It is always easy to be critical, harder to say what one might do if responsible for making decisions. So what would be good for the economy? What policies should we follow?

First, one must decide what the problem is. Fear and uncertainty seem to be at the top of the list. The University of Michigan's Consumer Sentiment Index is the lowest we have seen since 1980, the start of the last "worst" recession since the Depression. Consumer spending accounts for 70 percent of GDP and all of the associated jobs that support that spending.

More optimistic consumers might be willing to spend more if they were more confident about the future. What worries them? Well, at the macro level, pictures of Athens and London burning due to austerity measures to deal with deficits are disturbing, especially in light of the inability of the administration of President Obama and Congress to come to grips with our terrifying debt path. A sensible plan that Main Street could understand and believe in would have encouraged consumers to spend a bit more, even as they try to repay their oversize debt burden. One in four small-business owners reports the top business problem is weak sales.

An additional 35 percent of small-business owners cite taxes and useless red tape as their top business problem. The administration has gone to Congress to ask for higher taxes on small businesses to support government spending, which is now a record 25 percent of the gross domestic product. The president asserts that the rich (a couple earning more than $250,000) are not paying their fair share, and desires to raise taxes on these individuals.

Banking, health-care, and environmental regulations are being churned out at a fast pace, a process that is expected to continue for years. At a local small bank, more time is spent on regulatory compliance than growing the business. Regulations burden entrepreneurial talent, diverting it from creating wealth and jobs. So, meaningful regulatory evaluation and relief would be very helpful.

Of course, taxes of all types are penalties for the various activities taxed (like working, smoking, drinking, using a phone, etc.), and every dollar taxed by government is a dollar that the private sector can't spend or invest.

With government spending accounting for a quarter of our total economic activity, many question whether we are getting our money's worth from government using the money rather than leaving it in the hands of the private sector. Taxes are set to increase at year's end, tax rates we have had for a decade are set to rise, and the temporary reduction in the FICA tax is set to expire.

Many in Congress want to raise taxes even more than these expirations will accomplish. Taking more from a struggling private sector can only be justified if we think government spending will be more useful than the private spending and investment it replaces. So the question is, who should spend less, government or consumers and businesses?

I would support reducing government spending, reducing the need for more taxes to close the deficit.

When I look at the details of how the "stimulus" money was spent (details available on the Internet, of course) and the waste that plagues government programs, I favor cutting government spending and not raising taxes.

I support cutting some taxes in the context of a long-term program that will balance the budget and reduce our indebtedness relative to our income.

The notion that the rich can be taxed enough to eliminate the deficit is nonsense. If all of Bill Gates' wealth (not just his income) were seized and liquidated, yielding, say, $30 billion, that would be enough to give the poorest 20 percent of the population a one-time payment of $1,000. One time, because Gates would be poor when the next year rolled around.

The $1,000 is not enough to change anyone's life permanently and fix our problems.

A sensible program would restore confidence in the future of the U.S. economy, which would lead to more spending and investment. This fear and uncertainty is a major roadblock that must be removed. Giving citizens a reason to believe in the future and to feel safe would promote the growth and job creation we need.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on small business. Contact him at dunk@edu.com.