Wednesday, July 22, 2015

Detroit's Attempt to Balance The Budget Contracts Present and Future Economic Growth

Detroit, as well as many other local municipalities across the US, chronically spending more than they collect will be raising taxes in attempt to close hefty budget deficits. Few politicians understand or care to understand that taxation and economic growth are related. Rising taxes which tends to lower standard of livings for Detroitans curbs not only current but also future economic activity. Declining economic activity, in turn, reduces future revenues collected.

Even though many of today's governments adhere to a modified form of Keynesian economics, they fail to acknowledge that even Keynes's recommended a reduction in taxes during economic contractions. Government's tendency of self-preservation, a distinctive human behavior, almost guarantees the response to severe economic contraction will be to 'balance the budget'.

For example
Jones said there appears to be no end to annual water rate increases (for Detroit). "How do we know that won’t continue next year?” Jones said. “And each year we will have a water rate increase?”

This balancing process, playing out in real-time in cities across the United States, is described as austerity today.

Herbert Hoover learned during the early stages of the Great Depression that balancing the budgets only accelerated the economic contracting by reinforcing the vicious downward spiral. Perhaps history repeats because the education process, despite the slogans and high price, fails to properly teach the next generation.

Headline: Detroit council approves 7.5% water rate increase

The Detroit City Council voted 5-4 today to approve a 7.5% water rate hike that it initially rejected three weeks ago.

The council approved the rate hike today after hearing that the water department would be left with a $27-million budget deficit that would result in layoffs and possibly an extension of state oversight of city finances.



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