Government is not hurting the economy – service economy it’s hurting itself

The Washington Post article by Ezra Klein, “Government is hurting the economy – by spending too little“, brought to my attention by my friend Michael, attempts to convince us that the government spending is the key to the robust economy. The statistics seem to work in Mr. Klein’s favor. The government spends less, the economy dunks.

Source: Der Spiegel 5/11/12

We all know, the statistical data can be interpreted in dozen different ways. One obvious conclusion from this article is the increased dependence of the service economy on the government spending. Just take a look at the Der Spiegel graph showing the correlation between the national debt, manufacturing jobs, and foreign trade deficit. Loosing well-paying factory jobs leads to an increasingly unstable service economy.

Want a proof? Why would a real estate bubble affect the US economy in such a devastating way? No, it’s not because of the foreclosures but because of the lost construction jobs in both residential and commercial markets. Housebuilding is one of the last, true manufacturing niches that remain in the US. Of course, until, someone in China develops an inexpensive way to build modular homes and ship them with ready-to-assemble manuals.

The basic foundation of Mr. Klein’s article if simply misleading. How is the “government” founded? Government this and government that. Government would not exist without OUR money. So really, we are already spending the money and helping the economy, except, in the confiscatory manner.

Is the private sector without a fault? Of course not! shipping thousands of jobs abroad to raise profits for selected few, killed the internal balance of making and spending money by the middle class (if such still exist). Service economy will never be able to fill the gap left by the heavy industry.

US government to the rescue. The interconnected paths of the private and government spending is becoming more and more important to the economy. With the federal government spending our money in every possible way, no wonder private companies look up to the mighty uncle Sam to throw them a bone. Cash for clunkers anyone? Electric vehicle credits? Military contracts? Shovel-ready jobs? Everyone jumps on those government contracts.

So the real question is, how can US survive without the artificial government spending? The larger slice of the economy is overtaken by the government, the more risky the economy becomes. PIIGS countries anyone?
Unfortunately, once the government starts growing without a control, going back is almost impossible without an unpopular and devastating cuts. By the same token, there is a limit of taxation by the government. How much tax confiscation will take for people to revolt? Learning from Gerard Depardieu and Nicolas Sarkozy, about 75%.

Finally, I would read Mr. Klein’s post as a warning and a lesson. If we continue to depend on the government spending, let’s just nationalize the economy and stop pretending that our current system is a pure capitalistic ever-profit-giving golden goose. Perhaps Mr. Obama should put aside the popular replacement issues (healthcare, immigration) and concentrate on what’s the most important at the time – our wallets.

Simple taxes?

The discussion in the media about flat tax, progressive tax, business tax, divided tax, and all other taxes, comes and goes every year.  Laffer curve is a big one too.  But how much taxes do we pay?  Looks like more than half of our money is going to various taxes.  Considering that college cost and health care is not included in the deal, the financial strain is huge.

Ratified in 1913, The Sixteenth Amendment, states:
The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. 

Why not revoke the The Sixteenth Amendment and let Federal Government deal directly with the states?  States would pay whatever necessary to support the Federal Government affairs and citizens would gain a clearer tax picture.

States would set one flat income tax rate removing any property, use, excise, toll, and fee taxes.  Feeling underprivileged?  Let's set the tax exemption at $15,000 for single and $25,000 for family of three.

You don't like the tax rate?  You move to some other state.  

What about Social Security?  Well, people should be responsible for their own money.  I don't mind taking my contributions and investing it myself.  And Medicare?  The states already run their health care services, taxes should cover that also.

And local governments?  The only tax that would be fair is a sales tax.  You consume more expensive items, you pay more.  One more thing.  There is no need to have a city or county employee for every little task.  Cleaning lady getting a guaranteed pension plan after 25 years of work?  That's sounds good, but only to the cleaning lady. 

You don't like the idea?  Why not run a household like a business then?  You deduct food, clothes, gas, housing, transportation cost, education cost, and whatever else you can before paying any taxes on what's left.  What would you call your business?  Business of living and raising kids.