Sunday, 4 November 2012

Being rude about austerity


How rude should I be about policymakers? Some may think this a strange question, but I personally have quite a high regard for them. Having spent some of my formative years working in government, I can certainly appreciate the difficulties they face. Sure, there are unspoken (in public) political imperatives that drive a lot of policy, but I don’t think politicians’ public concern with social welfare is entirely a facade, and it is certainly not among most of those who work for them – quite the opposite, in fact. So when I wrote this (see final paragraph) about belief in the confidence fairy, I did worry I was allowing rhetoric to get the better of me.

Now in mitigation, I have to say that the 2010 switch from fiscal expansion to austerity does make me very angry. I’d like to think that this is just because of the immense harm it is doing, but there is something else as well. It represents the abrogation of knowledge: knowledge which, largely through accident, I was particularly aware of. I think this is something that even economists who are not macroeconomists, and not just non-economists, do not fully appreciate. In the mid-2000s my main research was on monetary and fiscal policy interactions, and this was a field that appeared to be characterised by considerable common ground, and certainly not by alternative ‘schools of thought’. Some of this knowledge began to be applied in 2008/9, and even an institution like the IMF which was famed for its fiscal conservatism was quite happy applying that knowledge.

It is as if you are a doctor, treating a patient with proven but also state of the art medication. The patient is not well but the treatment you are applying is working. Then suddenly the hospital administrator tells you to stop, because the drugs are expensive and they would like to try some spiritual healing instead. And, in case you ask, the financial crisis did not suddenly render the sum of macroeconomic knowledge accumulated over the previous decades obsolete (whether embodied in textbooks or DSGE models).

But in a sense all this makes trying to be dispassionate about the reasons for the switch to austerity all the more important. So here is a list. I’ve talked about all of these before, but not in one place. These reasons for advocating austerity are not in order of their relevance (see Farrell and Quiggin (pdf) for the basis of such an assessment), but I am going to give them marks out of ten, where the lower the mark the more rudeness is justified.

“Our government cannot sell any debt.” Here I draw a sharp distinction between those in these countries, and those outside. For those inside, I think the choice between austerity and default (there was no other option) was very difficult, and I would only have minor criticisms: sometimes a failure to adopt the right fiscal mix, sometimes going further than was necessary, and sometimes being naive about the position and motivation of their creditors (perhaps through collective guilt). So 8/10: rudeness not appropriate. For those outside these countries (many in the ECB, Commission, Germany etc), a very different assessment – see below.

 “After Greece, it could be anyone next” or more simply “Panic!”. Many policymakers convinced themselves that markets, in refusing to buy certain countries debt, were behaving irrationally – after all we had just had a financial crisis where they also seemed to behave in this way (either before, or during, or both). In these circumstances, ‘confidence’ becomes the word of the moment, and appeasement to a particular reading of market sentiment understandable (although wrong). Here I give (6-2x)/10, where x is the number of years after 2010. I can forgive policymakers being confused in the panic of 2010, but by 2011 we understood much better what was going on, and the evidence by 2012 that this was a particular Eurozone problem generated by ECB behaviour became so clear that even the ECB understood. (As you can see, 2/10 means I can be rude!)

“We want our money back.” Again a reason that is only relevant to those who lent to certain Eurozone economies. A common enough human motive, generally coupled with a belief that creditors bear no responsibility for properly assessing risk. Not a good way to lend money (see 2007/8 and earlier), and certainly not a good basis for macroeconomic policy. (“Oh, did we play a major part in designing this system?”) Also largely self defeating. What comes into my head as I write is Destroyer of Worlds, and I don’t think that is far wrong. Does not deserve a mark.

“The recovery is well underway, so now is the time to deal with debt.” What this argument has going for it is that at some point it becomes correct. In addition there are policy lags, and forecasting is difficult. But it is also true in macro that timing is everything. The argument was wrong in 2010, because it failed to take seriously the asymmetric nature of the consequences of forecast errors. So (6-3x)/10. By now those who advocated austerity on this basis should have changed their minds, which some have done to their credit (and I mean that – it is difficult to admit mistakes).

“Monetary policy can take care of demand.” What I have called Zero Lower Bound Denial. There is perhaps some evidence that this belief was part of the UK Conservative Party mindset (see end of this post), but I think it is more prevalent among some bloggers, or economists who are not macroeconomists or who ‘missed’ the lost decade in Japan and who thought the Great Depression was just history. There, I’ve revealed my mark by my language again: 2/10. A slight variant in the UK is “without austerity, interest rates would have been higher”, which owes a great deal to hindsight (and higher VAT).

“We need to reduce the size of the state” (apart, perhaps, from the bit that buys military hardware). 0/10, not for the belief itself (that is mostly politics, with very little macro), but for duplicity. Chris Dillow might add, follow Kalecki, a view that the working class needs to be controlled, but I think that was UK 1981, not world 2010. Less than 0/10 for the variant that says what the state does in another country is a waste of money, because even if it happens to be true it combines duplicity with imperialism.

“What aggregate demand problem” or more succinctly Demand denial. A strange belief that should have died when J.B. Say realised his error, but which resurfaces from time to time and place to place. 0/10.

“Reducing debt is virtuous.” I hesitate to include this, because I do not seriously think any policymakers actually believe it (they are often the same people who happily spend or cut taxes in a boom). The macroeconomics is obviously silly – not everyone can run a surplus (so 0/10). Unfortunately this kind of economics as morality does seem to influence some people. The argument that “we cannot waste any time tackling the problem of debt” faces similar problems, and is also not really believed by many who make it.

So there you have it, and yes, I do feel much better having written this all down. But will it stop me being rude in the future?

34 comments:

  1. Why have you omitted the common memes 'We'll be punished by the markets if we change course' and 'You cannot borrow/spend you way out of a debt crisis

    ReplyDelete
    Replies
    1. Well, I did sort of cover them under 'Panic' and 'Virtuous' respectively, but you are right that there are many variations on a theme. Funny how those arguing against austerity just have this one argument - it hurts output and jobs. We clearly lack imagination.

      Delete
  2. You undermined your argument with that jab about spiritual healing. You imply that all spiritual healing is fraudulent and all modern medicine is correct. If spiritual healing was always fraudulent the miracles of Jesus would have had no precedent or cultural context. If I was given a choice between cancer treatment that destroyed fertility and spiritual healing, I would choose the latter. You also wrote about Greece without writing about the corruption and about reducing the size of the state as if that was unconnected with rewarding donors and friends with privatization contracts.

    ReplyDelete
  3. What about this one: More debt now means higher distortionary taxes later. For some discount rates, this will not be a good trade-off. See, for example, Uhlig, Some Fiscal Calculus, AER 2010 (2) p. 30-4.

    ReplyDelete
    Replies
    1. If you are worried about this, why not substitute lower future government spending for higher distortionary taxes? More debt now can just mean less future government spending.

      Delete
    2. Because it is impossible for a sovereign to credibly commit to lower spending in the future. When groups of people become accustomed to receiving benefits it is politically difficult to cut them off.

      Delete
  4. Easy for a Brit to say but for the USA where the government has a finger in every pie, it is totally different. The average household pays 75% in taxes counting property tax and the cost of a family health policy. Government mandates require a car (average cost 8000$/year) with feature creep and 4000 pounds of excessive engineering. The government then lends at a teaser rate so the average person can make this totally uneconomic purchase. Teaser government loans to students raise the cost of education which actually serves to signal and not necessarily educate. Teaser rate government loans tempt the median family into houses that serve no economic purpose other than shelter. Remind us which government has actually tried austerity( a PR term for reality). It is not whether to borrow but how to specifically spent the money.
    We are regressing to the mean for the NFP, taking the long view that mean could be fairly low. Governments tried to generate an unrealistic bubble of labor participation and it did not work. Some jobs should not be financialized.

    ReplyDelete
    Replies
    1. Golly, that bears only glancing resemblance to the USA I've known and inhabited for 60+ years. (I should have been ruder....)

      Delete
    2. I couldn't understand your post, could you translate it into English?

      Delete
    3. I think you sneezed and accidentally typed nonsense.

      Delete
  5. Cheryl: Not to get off track too much, but read Barbara Thiering's books on the New Testament. The New Testament is a literal history of the times of Jesus Christ and the formation of the Christian Church. The various miracles were in fact, once one understands the 'peshar' or underlying story, not miracles. Tease: the word Satan when properly translated, means treasurer. Judas was the treasurer, Satan, for Christ's particular group. Kind of clears a few things up, doesn't it.

    ReplyDelete
  6. Rather well done here, the buried head and a pat on BoE's derriere - http://www.businessinsider.com/el-erian-another-financial-crisis-2012-11

    We don't need experts, but rather expertise :-)

    I now divert to my crystal ball - http://www.crewechronicle.co.uk/crewe-news/uk-world-news/2012/11/03/debt-crisis-to-last-five-years-96135-32160373/

    and to WEF's lastest ongoing salvation in reworking Polanyi.


    Schwab -
    http://www.huffingtonpost.com/klaus-schwab/end-of-capitalism----_b_1423311.html

    Bulgarian rep -
    http://m.free-press-release.com/news-bulgarian-representative-at-the-world-economic-forum-1327391717.html?refer=tag-right-news

    Quite why the payments system remains in the hands of those who hold us to ransom, is a dilatory disrespect of democracy that should become all to apparent in sniffing around the periphery of... the ECB and its rules.

    http://www.ecb.europa.eu/paym/coll/loanlevel/html/index.en.html

    regards

    Purple

    ReplyDelete
  7. Do asset prices matter, if they maintain their earnings?

    How do monetary assets properly reflect underlying fundementals - they do not. Therefore bubbles are still inflating?

    From the land of the rising bubble -

    http://www.businessinsider.com/zervos-on-boj-decision-losing-independence-2012-11?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+clusterstock+%28ClusterStock%29

    ReplyDelete
  8. For those who were never properly advised, Jesus was crucified because he upset the actuarial tables.

    Sinned or sinner - the argument persists, l believe.

    ReplyDelete
  9. The one that really gets to me is the "when times are tough, a family has to tighten its belt and so should the government" thing. It is even more unconscionable, as you've pointed out before, when suh cutbacks are on things that make society wealthier in the long-run, like education, infrastructure and health. My position on public sector spending is two-fold: "It's aggregate demand, stupid" and "Why choose shared pain when we can choose shared prosperity?" Your blog posts are good aa gold (well, even better than).

    ReplyDelete
  10. I'm not sure I understand why telling it as you see it is being rude. But more importantly, isn't the case that unless people like you and Paul K and others keep telling it as they see it, we will never stop making these mistakes? To a certain extent, it behooves you, as somebody who has understood, who knows something that can change the amount of pain inflicted onto folks to speak up about it.
    Especially when something that defies logic & educated common sense seems to have enthralled so many otherwise intelligent people.

    To me the austerity madness is a large scale Milgram experiment with multiple experimenters in the form of internalised illogical beliefs. In the case of the general public these beliefs can be corrected once you explain how national economy is not like household economy.

    When it comes to higher echelons of politics though, I believe that the problem is not just one of misguided beliefs (like in the confidence fairy), but also one of political spine, total lack of interest or concern of what is actually good for the country and general amateurism. Anybody could have done 'austerity', cutting spending.






    ReplyDelete
  11. I love the fact that people are blaming ben bernanke and the goverment. No no...wrong! They should be blaming those higher up, they will put debt as their god untill it gets so bad, that they will have to collapse everything.

    The elites plan is working. I listen to www.forecastfortomorrow.com that guys is eery accurate and knows what is happening. This is planned, and what happens next will be catasrophic if you are one of the sheeple out there.

    Great post! by the way.

    ReplyDelete
  12. The ZLB denyalists have a point that is very strong. In the Great Depression the ZLB was easily escaped by leaving the gold standard. No ZLB problem there but a gold standard problem. In the case of Japan, Scott Sumner has argued that the BOJ does not want higher inflation, and that the ZLB is not the problem, but the too hawkish mindset. Arguments in favor of this are (a) the time it took to finally hit the ZLB, (b) rate hikes in the benchmark rate, and (c) an appreciated yen versus the dollar. He argues that the key is expected inflation, and that no central bank that has actually tried has failed to generate inflation.

    ReplyDelete
    Replies
    1. I disagree. See this post on why austerity reduces welfare even if we have NGDP targets: http://mainlymacro.blogspot.co.uk/2012/05/austerity-nominal-gdp-targets-and-zero.html

      Delete
  13. But doesn't the post assume the ZLB does actually exist? The assumption is that given the CB cannot do anything today, it will influence expectations of what it will do tomorrow. But the whole point of Scott Sumner is that the CB has more tools other than the interest rate, and that the relevant variable is the monetary growth. In other words, the CB can increase inflation today even if rates are at zero.

    The reductio ad absurdum argument is the following: if the CB were to buy (today) every asset in existence, inflation (today) would be infinite. What is wrong with this argument?

    ReplyDelete
    Replies
    1. Yes, maybe if the CB printed enough money to buy enough assets.. But it would be a lot easier and more certain for it to use that money to let the government buy goods.

      Delete
    2. Ah, but then the ZLB doesn't really exist! Maybe it is better to let the government use the money to buy goods (I don't know), but the CB can (if it so wishes) put the real interest rate wherever it wants.

      Delete
  14. I think the biggest criticism that is left out of this article is the fact that austerity has actually done very little to reduce sov debt burden in peripheral European economies. If someone such as myself with a few semesters of college economics could figure out that these plans were doomed from jump street using basic accounting identities (current account = -1* capital account) why couldn't the supposed geniuses in charge of determining eurozone policy not realize this was the case? This is very simple when you run a current account deficit of over 10% of GDP w/ countries with which you a fixed exchange rate you're f*cked. There was no reason for Greece and Portugal and likely Spain to leave the Euro and this was obvious after about a day's worth of research in 2010.

    ReplyDelete
  15. It seems to me that Mr. Wren-Lewis overlooks the two most frequently articulated rationales for austerity. The first (articulated by certain people primarily inside the country at issue) is that the failure to reign in spending will only "kick the can down the road" and lead to larger problems in future years. A variant of this view is that failure to reign in spending now creates an unfair burden on future generations, who will have to pay for the massive bills we run up today. The second rationale (articulated by certain people primarily outside the country at issue) is that we outsiders should not have to pay to subsidize irresponsible spending in the debtor country and, if the debtor country wants our assistance, we need to see that it is taking the hard steps to get its fiscal house in order. This rationale in turn has two sub-rationales: (i) without structural reforms in the debtor country (a/k/a austerity), lending it money will only paper over the real problem and not solve it, and (ii) the moral hazard argument, i.e., that loaning money to debtor countries without imposing strings (a/k/a/ austerity) will only encourage the debtors to continue their spendthrift ways. I would have liked Mr. Wren-Lewis to address these rationales for austerity.

    ReplyDelete
    Replies
    1. Your first is addressed in my last - see the last sentence and links therein: the first link deals with the 'we cannot wait' argument, and the second link with the generational issue. Your second is a mixture of 'we want our money back' and the imperialism I talk about under reducing the size of the state.

      But as you raise this last point, can I ask the following? When you get a loan to help buy a house, is the loan company subsidising your irresponsible behaviour, and does it have the right to monitor your spending on other things, and generally tell you how to run your life. The loans being given to periphery Eurozone countries are at pretty high interest rates, so where is the subsidy? If they end up defaulting on these loans, that will be the result of the austerity imposed on them. If you think these countries are carrying on their spendthrift ways, just look at the data: here for example from the IMF: http://mainlymacro.blogspot.co.uk/2012/10/different-approaches-to-austerity.html

      Delete
    2. Thanks for taking the time to respond to my post, but I still don’t see things the same way you do. Due to space limitations, I will respond in two separate posts.

      First, I don’t think your last sentence and the links answer my first point. I am not saying that indebted countries should cut taxes, run a surplus or even reduce the debt. What I am saying is that many people who advocate what you call “austerity” are simply arguing that it is better for the economy in the long term to reduce the GROWTH of the debt, and sooner rather than later. I live in the US. For the last four years, we have run annual deficits in excess of $1 trillion, and these trillion dollar deficits are projected to continue as far as the eye can see. These four years of deficits have ranged from 8.5% to 10.1% of US GDP, a higher per cent than in any time in our history except for WWII (which, for the US, lasted only 4 years). Even during the Great Depression, the deficit never exceeded 5.9% of GDP (in 1934). Further, when the baby boomers start retiring in significant numbers over the next decade, and when interest rates rise (as they surely will do at some point within the next 10 years), the deficits during the last four years will look small in comparison. Yet the Keynesians say the deficits are not big enough, and argue that only if the federal government “temporarily” borrows and spends more (and runs deficits of $1.5 trillion, $2 trillion, or whatever), “aggregate demand” will somehow increase and the economy then will be in a position to resume “normal” growth without the prop of so much government spending. But how long is “temporary?” Wouldn’t four years of $1+ trillion deficits be enough? And, even if increasing the deficits would result in short-term gain, what about the burden these growing debts place on the next generation? During FY 2011, the interest alone that the US government paid on Treasury debt totaled $453 billion. The US government projects that by FY 2017, this amount will increase to $809 billion. I am no economist, but shouldn’t an economist be concerned about the long-term impact of this growing debt burden? As I read what you have written, you say in essence that cutting government spending when the private economy is contracting will lead to further contraction. No quarrel there. But I don’t see where you address the long-term effects of the failure to reign in these growing costs.

      Delete
    3. Here is post # 2, responding to your second point.

      First, in response to your query whether the loan company is “subsidising your irresponsible behavior” when I “get a loan to help buy a house,” the answer is clearly “no” (unless, as happened all too frequently in the US during the lead-up to the financial crisis, the bank lowered its lending standards and lent me money to buy a house it should have known I could not afford). But that is beside the point. The “austerity” issue regarding the bailouts of debtor governments is the reasonableness of whatever restrictions the lenders want to place NOW, on the NEW (i.e., bailout) loans. One cannot redo the past, but one can take steps NOW to try to influence the debtor’s behavior so that the need for loans don’t continue ad infinitum.

      Second, in asking whether, when one takes out a loan to buy a house, the lender has “the right to monitor your spending on other things, and generally tell you how to run your life,” it appears to me that you have never read documentation pertaining to a BUSINESS bank loan. You are correct that mortgage loans granted to individuals to enable them buy personal residences do not give the lender “the right to monitor your spending on other things,” but that is definitely NOT the case with respect to bank loans to businesses. Bank loans to businesses typically are made pursuant to loan documents containing numerous covenants which give the banks the right to monitor the borrower’s operations closely, to require that certain types or amounts of payment be cleared with the bank in advance, to insist on changes in operations and to seize collateral or call the loan if the covenants are breached. Loans to governments are far more akin to loans to businesses than to individuals. And the biggest complaint about the TARP program in the US is that it lent money to banks without insisting on conditions (such as relief to homeowners and cuts in executive pay). So the concept of placing conditions on loans to debtor entities (whether governments or businesses) is nothing novel or untoward.

      Third, as to whether European governments “are carrying on their spendthrift ways,” I understand that they have taken steps, some more successfully than others, to cut spending. But one cannot ignore how they got in their present dire straights. Even you have to agree that Greece’s problem, at its core, is the result of its government’s years of borrowing and spending beyond its means. As for other European countries, you might want to look at the following articles: http://www.nytimes.com/2012/07/23/world/europe/sicilys-fiscal-problems-threaten-to-swamp-italy.html?pagewanted=all (Sicily and Italy) and http://www.nytimes.com/2012/07/19/world/europe/in-spain-a-symbol-of-ruin-at-an-airport-to-nowhere.html?_r=0 (Spain). And this problem is not limited to European governments or the US federal government. See http://www.businessweek.com/news/2012-10-24/volcker-ravitch-study-maps-illinois-pensions-path-to-insolvency (the state of Illinois in the US). Why shouldn’t lenders take the position that the type of nonsense reported on in these articles should stop as a condition to any bailout?

      Delete
    4. Thanks for you detailed arguments. On the first, I absolutely agree that the tendency for government debt to rise over time is an important problem, which is why I have devoted a considerable amount of my research time to it. This has involved thinking about rules that might limit this 'deficit bias', and institutions that might also help. (See either my home page, or search for 'fiscal councils' on this blog.) On the long term problem of government debt, I would probably be characterised as a hawk rather than a dove.

      But this is a long term problem, which is best solved once the recovery is complete. Trying to solve it now through austerity causes much more harm than good.

      On your second point, consider the implications if I am right about the first. Creditor countries, by imposing austerity, are damaging other countries. That is an incredibly dangerous thing to do politically, even putting aside any moral issues. While creditor countries may believe they are 'doing it for your own good', it can easily been seen as a simple attempt to ensure the creditor does not lose any money. Nor do I believe such interference is necessary. History is full of examples of attempts by one country to impose something on another 'for their own good' that backfire terribly.

      Delete
    5. It seems to me that there are areas I which we agree and areas in which we disagree. We seem to agree that (i) cutting government spending when the private economy is contracting exacerbates the weakness in the economy and (ii) government debt on a long term basis is a serious problem. Where we disagree is how to reconcile these two points and how long we should wait before taking any meaningful steps to try to get the debt under control.

      You say that the debt problem “is a long term problem, which is best solved once the recovery is complete.” My concern is that by the time the recovery is “complete” (however that is defined), we will be so buried under debt that we cannot get out and will permanently saddle future generations with a major debt burden that will be a drag on growth, as increasingly large portions of tax revenues will have to be allocated simply to paying interest on the debt. I wish I could feel more comfortable that waiting until “the recovery is complete” before starting to reign in spending would not be too late. But in the US, where the recession was caused by excessive private debt and debtors have to repair their balance sheets, I agree with the view that I understand is expressed by most serious economic commentators, i.e., that it will take us a long time to get out of this mess, regardless of what policies Washington pursues. I wish you Keynesians could assure us that by the time we eventually do get out, it will not be too late. As I said in my earlier post, there is a demographic tidal wave coming in the US that, coupled with a likely rise in interest rates, will cause the debt to skyrocket from its alreasdy elevated levels. I am not at all comfortable entering into this danger zone with a 4-8 year history of consistently running annual deficits in excess of $1 trillion. Tell me why I should not be worried.

      Delete
    6. I think there is a very straightforward solution to your concern. Analysis I have seen from the Center on Budget and Policy Priorities (based on CBO numbers) clearly shows where the short term problems with the US deficit come from. Not from the Obama stimulus, and as the recovery moves forward not from the recession, but from the Bush tax cuts. Luckily repeal of these tax cuts, because they mainly impact on the rich, will not damage the recovery very much. So allowing the Bush tax cuts to expire would do a great deal to reduce the deficit without doing much damage to the recovery.

      On longer term demographic problems, I think controlling health care costs is the main priority, and Obama has made some progress here. From my point of view there is one major obstacle to controlling the US government deficit in the longer term, and that is the current stance of the Republican Party. I think that is where your worry should focus.



      Delete
    7. I don’t buy the view that the US short-term deficit is a result of the Bush tax cuts or that repeal of them will solve the problem.

      First, if you look at data published by the US Office of Management and Budget (http://www.whitehouse.gov/omb/budget/Historicals/), you will see that in both dollar terms and as percentages of GDP, the deficits rose initially after the enactment of those tax cuts (the most significant of which went into effect as of January 1, 2003), but thereafter steadily declined to almost negligible levels up through fiscal year 2007 (ending Sept. 30, 2007), before rising markedly with the onset of the 2008 financial crisis and the steps taken to respond to that crisis (TARP, Obama stimulus, the liberalization of eligibility requirements for various benefits programs, etc.). Thus, the OMB figures for the deficits in dollar terms (Table 1.1) are as follows: 2003 - $377 billion; 2004 - $412 billion; 2005 - $318 billion; 2006 - $248 billion; 2007 - $160 billion; 2008 - $458 billion; 2009 - $1.4 trillion; 2010 - $1.29 trillion; 2011 - $1.29 trillion. Likewise, as a per cent of GDP (Table 1.2), the deficits were as follows: -3.4% for 2003, -3.5 % for 2004, -2.6% for 2005, -1.9% for 2006, -1.2% for 2007, -3.2% for 2008, -10.1% for 2009, -9.0% for 2010, and -8.5% for 2011. Keep in mind that the Iraq war was at its height in 2005 (remember the post-2004 election “surge?”), but despite the increased war spending and the continuation of the Bush tax cuts, the deficits were on a downward trend after 2004 until the financial crisis hit. The huge jump in the deficit from $160 billion and -1.2% of GDP in 2007 to $1.4 trillion and -10.1% of GDP two years later occurred despite the absence of ANY change in US tax law and despite the decline in war spending that had begun by then. In light of these facts, I can’t see how repeal of the Bush tax cuts would significantly reduce the deficit.

      Second, I think you are unaware of the political realities in the US. Few (if any) of the politicians in the US advocate repeal of all the Bush tax cuts (which are currently scheduled to expire on their own as of December 31). The Republicans want to extend them in their entirety, for all taxpayers, whereas President Obama and the Democrats want to extend them for all but the top 2% of taxpayers (individuals earning at least $200K per year and couples earning at least $250K per year). While taxpayers in the top 2% benefitted the most on an individual basis from the Bush tax cuts, the dollars saved or lost on an AGGREGATE basis from the expiration or continuation of those cuts would come primarily from the bottom 98%, simply because they comprise 98% of all taxpayers. From statistics I have read, even if President Obama gets his way and the Bush tax cuts are allowed to expire for the top 2% of US taxpayers, that would result in annual savings (assuming no adverse effect on economic growth) of only about $45 billion per year, which is less than 5% of the current deficit (which, for the fiscal year that just ended, was $1.1 trillion). So don’t expect any change in US tax policy to have any meaningful effect on the US debt issue.

      Delete
    8. Have a look at the analysis here: http://www.cbpp.org/cms/index.cfm?fa=view&id=3849

      Delete
  16. How about the mindless 'the way to solve a debt crisis is not more debt' argument? That deserves much rudeness.

    ReplyDelete
  17. Deficits equal net private and foreign saving/de-leveraging.

    With the Asian crisis, their rulers learned the importance of hoarding/saving dollars as a buffer against crisis and capital outflows.

    Given US net saving generally oscillates around 4% and foreign net saving in US dollars increased, the mean US deficit became 4% plus the foreign deficit/savings.

    Given financialisation/liberalisation temporarily filled the spending gap caused by the flatlining of real US houshehold earnings, an unsustainable build up of private sector debt ended when household consumers started to pay off the debt and cutting consumption; this lead to lower economic activity, lower taxes, lower employment and higher welfare spending aka a higher deficit.

    The big debts are owed by banks; a 200% gnp overhang, compared to the mid 90s levels, that will take a couple of decades to pay off at 10% deficits a year, assuming no other sector runs a financial surplus.

    http://www.3spoken.co.uk/2012/10/uk-sectoral-balances-and-private-debt.html

    Unusually high deficits will continue whilst the private and foreign sectors want to save/de-leverage.

    This would mean historically high deficits for a decade or so, like Japan; the alternative is what's happening in the Eurozone, compounded by the instability and stagnation pact, and the UK's broad ruling political/business class austerity consensus; high deficits and higher/more massive unemployment.

    ReplyDelete