In Washington, our political leaders argue constantly over spending and taxes — a fight that will no doubt make headlines in the weeks ahead. We will hear speeches, the media will be on attack, and congressional leaders and the President will be a fixation of CNN, Fox News, and more. Both sides of the aisle will proclaim a better plan that is essential to the economic future of this country. But, what is our government really saying?!
As it pertains to fiscal policy (i.e. the government using taxation and spending to control the economy), one side wants to increase taxes and increase spending (Democrats). The other wants lower taxes and lower spending (Republicans). While this is indeed convenient that one party is screaming for “increases” and the other party preaches “lowering” — makes following along easy for everyone — in reality it makes no sense at all and is fairly outrageous to anyone with an understanding.
Those with knowledge of fiscal policy know that increasing taxes is a means of slowing down the economy, while increasing spending is simulative — our Democratic leaders have coupled two completely counter initiatives. Meanwhile, lower taxes are simulative, while lower spending is a means of slowing down the economy — our Republican leaders have made the same error as their Democrat counterparts, only with the exact opposite methodology. They have both managed to choose fiscal paths that defy logic.
The use and effects of fiscal policy are something most of us learned in Econ 101 and quite honestly are not that difficult to comprehend. More money into the economy helps growth — a goal accomplished through lower taxes and/or increased spending. Conversely, less money into the economy hurts growth — a goal accomplished with higher taxes and/or decreased spending.
It is actually quite a simple decision — do you want to put money into the economy (stimulate) or take money out of the economy (slow)?! But somehow, in their effort to prove the other wrong, both Republicans and Democrats have missed one important point in this all but overdone debate… They are both wrong. “Increasing and increasing” (Democrats) doesn’t work. Nor does “lowering and lowering” (Republicans). This ideology is not only unproductive, but will only waste even more valuable time as our unemployment rate continues to rest near nine percent and our lackluster GDP growth continues to infuriate markets.
Ultimately, in addition to maybe needing an immediate crash course in economics, Washington also must quickly learn that one cannot stimulate growth and reduce the nation’s debt at the same time (something both parties erroneously claim possible.) This mentality is simply ridiculous. These two things, spoken from someone who actually teaches fiscal policy, cannot happen concurrently. It is less than possible, inefficient, and plain risky.
We need to stimulate — which means lower taxes (Republicans) and increased spending (Democrats). And, we desperately need the courage to act. It takes great bravery and conviction to stimulate properly while carrying so much debt (nearly $15 trillion and counting). And this, I would add, is the main ingredient missing in the circular debate happening in Washington and around the country. We need leaders willing to make difficult decisions, and willing to take the risk in truly stimulating this economy despite high debt levels. Otherwise, the financial outlook for this country will continue to look bleak. Ironically, as our “leaders” continue their debate for many months or years, their inaction or unwillingness to properly stimulate has already become, and will continue to be, the greatest risk of all.
Jonathan Citrin is founder and CEO of CitrinGroup, an investment advisory firm located in Birmingham, MI. He is an adjunct faculty of finance in the School of Business at Wayne State University.
Founded in 2003, CitrinGroup specializes in portfolio management and advises clients on investment planning.
Contact: 248-569-1100 or www.citringroup.com.