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Wednesday, June 24, 2009

Burned Alphabet Soup - The Death Of California

Yup, here I am again, yacking about politics - I made the mistake of buying a newspaper and thus lost my blissful ignorance of the many ways those idiots in Sacramento are killing my state. I had to brush the mental cobwebs off my various degrees in economics - (I really only have two) and start running certain "budget remedying proposals" through my rusty econ brain.

I have to wonder whether anybody up there in Sacramento ever attended a class in economics. In case they have not, I thought I would offer up a neat little equation they may have missed.

It goes like this:

GDP = C + I + G

It says our Gross Domestic Product is the sum of how much consumers spend (C) plus how much is invested (I -like when a business builds a new factory) plus whatever the government spends (G).

When C, I and G get bigger, GDP gets bigger and we hear on the radio that the economy has grown. Whoopee we think.

Sometimes one of them gets bigger and one of them gets smaller - or two get bigger and one gets smaller, or two get smaller and one gets bigger or they all get bigger - in any of those combinations, we can still get happy news on the radio that our economy is growing. (As long as whichever one(s) get bigger do so by more than the other(s) got smaller.)

There is one combination of C+I+G though, that is unambiguously bad. That is when C, I and G all get smaller. That is the opposite of growth. That is shrinkage. We also call that a recession.

Wise government types - or at least those who want to get re-elected, will try not to cause any more shrinkage in either C, I or G. Indeed, many will expouse the virtues of deficit spending to help "kick-start" the economy or of cutting taxes to help "kick-start" the economy.

Notice I said deficit spending and not just spending. Deficit spending implies you spend more than you bring in - Gov. Terminator is a big fan of this. Deficit spending makes our equation look like this:

Before deficit spending:
GDP = C + I + G

After deficit spending:

GDP = C + I + G

G
grows, C and I stay the same - economy grows.

If the government raises taxes, then C and I get smaller but G grows - and then everybody argues about whether G grows by enough to offset the now smaller C and I. Although it doesn't and cutting taxes would make C+I grow more than G shrinks

So, our state government here in California has put together a budget that both slashes spending and raises taxes. Meaning all three of our letters get smaller!

Like this:

gdp = c+i+g


Do you want to live in that economy? Note that this is on top of everything that is happening due to the financial mess. Our only option is to cut taxes by more than we cut spending. Or we are going to be in big, big trouble.

RH

1 comment:

Lisa @ Stop and Smell the Chocolates said...

Excellent post! And I have to say that I loved your visuals! Sigh, it's going to get ugly (or uglier) around here very soon.