I'm no economist nor have as deep an interest like many of you here so I may be complete wrong. Please educate me.
We have about a trillion dollar deficit, correct? I remember hearing we take in, say, $2.3 trillion in taxes and spend $3.3 trillion. Well, obviously, we want all would sleep better at night with a balanced budget.
So, we cut spending by 1 trillion dollars. What happens to that $1 trillion? It doesn't go to the taxpayers. It's not the taxpayers money. It's borrowed. We can't just give a $1 trillion tax cut because then we'd have $1.3 trillion in taxes and spend $2.3 trillion and we'd be back to where we started. $1 trillion would be exported out of the United States economy and into China, Japan, EU, or whoever loaned. They then spend it on whatever and wherever they choose.
So, we raise taxes by 1 trillion dollars. That's $1 trillion out of the pockets of taxpayers. It sounds terrible. But where does it go? From the United States public to the United States government and back through the United States economy. All the money stays here. It doesn't leave.
Is this not correct? It seems too simplistic so it might not be. Obviously I realize the government (DoD and State mainly) spends money outside of the United States all the time, but not a trillion.
An interesting angle to look at deficit reduction nonetheless.
There are a couple of problems with this. A basic observation is that some of the debt owned by the US government is owned to people within the country. So if you cut spending to pay them back you're simply shifting money around within the economy. Another point is that there is something of an element of Ricardian equivalence. That is, people tend to save more if there is a deficit because they realize that they will have to pay the deficit in higher taxes in the future. And thirdly, some of tha tmoney which flows into the pockets of external lenders will be spent by them on American products and thus come back into the economy.
None of tha twould explain away your basic point though.
The key problem however is that you create deadwight losses when you raise taxes. For instance, if you increase taxes on capital gains, some people will choose to invest some of their capital abroad instad. That will obviously hurt the economy. If you increase taxes on labour income, people will work less and that will also hurt the economy. And so on and so forth.
What people on both sides of the aisle don't seem to realize is that it matters a lot more precisely what taxes you increase and what spending you cut when talking about the effects on the economy. There are better and worse ways of dealing with both taxation and spending aside from the level.
