Thanks so much for the depth and detail in your comments. I am very concerned that the Legislature can’t (or won’t) reduce spending AND that further taxes are being suggested when so many people are already reeling from the bad economy…

Teri

If interest rates are high, the dollar increases in value, and [therefore] deflation occurs. The cost of taxation actually increases [as each dollar spent in taxes can buy more for the consumer/citizen.] Conversely, the government can purchase more for citizens [assuming revenues do not drastically change] and also can waste more [the dollar wasted has a higher opportunity cost; you could have gotten more with that wasted dollar.] Spending can be decreased if prices decline [while still maintaining the same service level.] If tax rates and income levels are maintained, despite taxes actually costing citizens/consumers/businesses/etc more [during a period of deflation] they can still buy more with their remaining resources [facing a particular budget constraint.] Remaining resources after taxes can buy more than when prices are higher. Crudely stated and to summarize… wasteful spending is more costly in times of higher interest rates and lower prices [specially if deficit spending is used to finance wasteful spending] then in times of lower interest rates and higher prices. Gov’t should cut wasteful spending to lower deficit spending and crowding out currently. Increasing taxes is wasteful while cutting “wasteful spending” is, tautlogically, not wasteful. We can minimize waste by focusing on the spending side. Ideally, to reduce waste [to a maximum level] requires decreasing taxes and decreasing spending. Gov’t ought only to spend when it is necessary and said spending provides a greater benefit, to the public, then the costs of funding it. Does state spending satisfy that criteria? In other words, do “we” need the services the state [and counties] provide? Are programs based on market failure [hence the necessity of spending?] The answer? HELL NO!
What should the state do to maximize financial prudence? CUT! CUT! CUT! CUT! Cutting spending is the least wasteful option [compared to the waste of increasing taxes to maintain wasteful spending.]

I mean increasing taxes is good for credit markets in so far as gov’t does not crowd out private investment by increasing interest rates. Capital gains taxes [at least on the federal level] can be a disincentive to invest and lend.

The problem with deficit spending , in our current economic crisis ,is a tight money supply. Government borrowing will cause a crowding out effect; increase in interest rates as government increases demand for loanable funds. Gov’t can make credit markets worse than they already are.

The most prudent solution [considering the credit market] , by the state, is to reduce spending. Although Keynes would defend spending [to maximize gov't impact in increasing demand]… some spending can be wasteful leading to an inefficient distribution of resources. [Ideally gov't should cut waste] If the credit market was not as tight [with government facing higher than normal bond rates] spending should be maintained [or increased] and taxes should be maintained [or reduced.] Again… the credit market complicates the matter. Increasing taxes while reducing spending is good for credit markets but lousy for promoting economic growth. While decreasing taxes and increasing spending is [assuming there is no waste by gov't] is good for economic growth it is absolutely lousy for bond/credit markets and will crowd out private investment. A compromise is needed. Increasing taxes is more costly [in terms of burden on taxpayers] then it is to decrease wasteful spending [which does not promote economic growth.] The problem is whether there is enough waste in the budget to cut 11 billion. The government must decide whether deficit spending is a prudent method of improving economic performance or improving the bond markets. The latter is more reasonable due to a cash flow problem [where gov't will have to borrow short term.] This process necessitates reducing debt or at least a balanced budget. However… a balance budget requires increasing taxes and/or decreasing spending. Again… the problem is that doing BOTH will or can worsen the current recession. Do one or another. My OPINION, is that decreasing spending is more [financially] prudent than increasing taxes. Politically.. cutting spending can be a nightmare versus progressively taxing the wealthy. I haved talked enough. Hopefully I was helpful.