How Does Deficit Reduction Make Economic Sense at This Time?

[Sunstone]

How does it make sense to to cut government spending when faced with high unemployment, excess unused industrial capacity, a complete absence of inflation, and the very real threat of a recessionary relapse?

 

[Mathematician]

Proponents of deficit reduction argue that while it may enhance the current recessionary cycle, spending contributes to economic chaos in the first place and in the long-run we'd be better off.

 

[Wandered Off]

It may not be entirely an economic issue. Saddling future generations with debt to support our current economy has some unpleasant implications, economic and otherwise.

 

[Magic Man]

It may not be entirely an economic issue. Saddling future generations with debt to support our current economy has some unpleasant implications, economic and otherwise.

But is this the time to worry too much about that? Obviously, we need to do something about the debt and not dump it all on future generations, but shouldn't the first concern right now be getting the economy back on track?

 

[Wandered Off]

Sure, you could make a reasonable case for that. Future generations would be even worse off if there is no economy left to work off the debt we passed them. The catch is that, if the currency collapses because of our debt & debt rating, we'll be worse off than just a prolonged recession IMO.

At the moment, I'm not convinced government spending is well-placed enough to benefit the economy as much as it will cost, but I'm no expert. If I trusted the judgment of lawmakers to be responsible and not influenced by lobbyists, then I wouldn't be as hesitant to let them spend whatever would help us. That's the trouble... Their spending is, in large part, what got us here. Asking them to spend more doesn't seem wise, and removing some of their funds to do more damage might do more help than harm.

Who knows? It's all speculation, and I'm not claiming to have a more valid view than yours.

Politically, it will never be the time for reduction. Nobody wants to give anything up.

 

[Magic Man]

Sure, you could make a reasonable case for that. Future generations would be even worse off if there is no economy left to work off the debt we passed them. The catch is that, if the currency collapses because of our debt & debt rating, we'll be worse off than just a prolonged recession IMO.

That's very true.

At the moment, I'm not convinced government spending is well-placed enough to benefit the economy as much as it will cost, but I'm no expert. If I trusted the judgment of lawmakers to be responsible and not influenced by lobbyists, then I wouldn't be as hesitant to let them spend whatever would help us. That's the trouble... Their spending is, in large part, what got us here. Asking them to spend more doesn't seem wise, and removing some of their funds to do more damage might do more help than harm.

Yeah, I won't argue about the stupidity of the people in office. I think more than anything, we need to cut some spending, like, oh say, two stupid wars, and redirect the money to more pressing needs.

Who knows? It's all speculation, and I'm not claiming to have a more valid view than yours.

Politically, it will never be the time for reduction. Nobody wants to give anything up.

Yeah, politically, maybe. That's the problem. We're reactionary. When things are going well, no one cares about changing things to improve them. It's only when a crisis happens that big changes are accomplished.

 

[Sunstone]

Future generations would be even worse off if there is no economy left to work off the debt we passed them.

I think that is a real concern. So far as I understand it, the economic prospects of future generations are heavily dependent on the economic prospects of their parents. For instance, if their parents can not get an education due to a tough economy, their children are less likely to get an education too.

The catch is that, if the currency collapses because of our debt & debt rating, we'll be worse off than just a prolonged recession IMO.

What are the odds of the currency collapsing when debt is a mere 60% or so of GDP? After World War II, if I recall correctly, debt was over 200% of GDP and the currency didn't collapse.

That's the trouble... Their spending is, in large part, what got us here.

I thought the housing bubble collapsing, not spending, was what got us here.

 

[Wandered Off]

What are the odds of the currency collapsing when debt is a mere 60% or so of GDP? After World War II, if I recall correctly, debt was over 200% of GDP and the currency didn't collapse.

I have no idea, but I think they are higher in a situation where the debt is largely held by economic rivals, which I don't think was the case after WWII.

I thought the housing bubble collapsing, not spending, was what got us here.

The 'here' I was talking about was being awash in federal debt, not the economic mess, for which the housing bubble is a large factor.

 

[Sunstone]

I have no idea, but I think they are higher in a situation where the debt is largely held by economic rivals, which I don't think was the case after WWII.

I'm not sure what difference, if any, it makes who holds the debt. But I'm not an expert, either. You might have a point.

The 'here' I was talking about was being awash in federal debt, not the economic mess, for which the housing bubble is a large factor.

I see. To be precise, excessive spending during good times got us in the mess we're in today. During good times, the government should ideally reign in spending so as to have money to spend as stimulus during bad times.

 

[Wandered Off]

I'm not sure what difference, if any, it makes who holds the debt. But I'm not an expert, either.

For the time being, I think China stands to lose more by our demise than it gains, but I'm not convinced that will always be the case. At some point, China may conclude it has more to gain by seeing us ruined and step in the void created. Maybe the odds are low, but it's a factor that wasn't there before, IMO.

To be precise, excessive spending during good times got us in the mess we're in today. During good times, the government should ideally reign in spending so as to have money to spend as stimulus during bad times.

Absolutely, but that makes so much sense it's out of the question for our elected representatives and their lobbyist overlords.

 

[Darkness]

How does it make sense to to cut government spending when faced with high unemployment, excess unused industrial capacity, a complete absence of inflation, and the very real threat of a recessionary relapse?

As John Maynard Keynes aptly said, "The long run is a misleading guide to current affairs. In the long run we are all dead." The wisdom that says we must cut deficits now, is absurd. There is no legitimate economic reason for it. President Roosevelt made the same mistake we are all making now. In 1937, government stimulus spending was cut back, and unemployment began to rise again. Inflation hawks are squawking because they have a belief in the nigh-divinity of a laissez-faire market. The battle of the flaws of laissez-faire economics was already won during the Great Depression. Unfortunately, as a society, we are suffering from collective amnesia, and we do not have a strong social liberal or socialist tradition to save us this time.

 

[cynic2005]

How does it make sense to to cut government spending when faced with high unemployment, excess unused industrial capacity, a complete absence of inflation, and the very real threat of a recessionary relapse?

The Bush years exasterbated what was already a disaster by increasing spending and at the same time, cutting taxes. So, the fiscal deficit substantially increased. The current economic recession exasterbates the problem even more. The greater threat however, lies in the fiscal deficit... If we keep spending and running deficits, eventually there will be no money to sustain defense, social security, and even the government itself as the debt and accumulated interest would be exponential (i.e., it would turn into a runaway greenhouse effect). So the only practical solution in the long run, is to cut spending, increase taxes, and focus on bringing the deficit down to tolerable levels (even in the face of economic recession).

By cutting taxes and increasing spending, we essentially deepen the hole. This is what got us deeper in the hole in the first place, under the Bush administration. If you want to increase spending, you have to raise taxes, not cut taxes and borrow money and run deficits to compensate. Of course this might help the economy, but did it help the economy during the bush administration? Oh wait, the economy was on the verge of total collapse... and this policy of increased spending and cutting taxes obviously didn't prevent this from happening... If its such a good idea, then maybe it should have mitigated the economic recession in the first place?

Does it make any sense to do more of what has failed in the past?

 

[Neo-Logic]

Deficit reduction always sound sexy, but for now, that's all it is -- a sexy sounding phrase. It makes no practical sense in our economic clout right now. Obama already elucidated this in the g20 conference. Long term it's good, short term we need to spend spend spend. But then again, a set date is important because we wouldn't want deficit reduction to always come tomorrow when tomorrow may never come.

 

[Sunstone]

The Bush years exasterbated what was already a disaster by increasing spending and at the same time, cutting taxes. So, the fiscal deficit substantially increased. The current economic recession exasterbates the problem even more. The greater threat however, lies in the fiscal deficit... If we keep spending and running deficits, eventually there will be no money to sustain defense, social security, and even the government itself as the debt and accumulated interest would be exponential (i.e., it would turn into a runaway greenhouse effect). So the only practical solution in the long run, is to cut spending, increase taxes, and focus on bringing the deficit down to tolerable levels (even in the face of economic recession).

By cutting taxes and increasing spending, we essentially deepen the hole. This is what got us deeper in the hole in the first place, under the Bush administration. If you want to increase spending, you have to raise taxes, not cut taxes and borrow money and run deficits to compensate. Of course this might help the economy, but did it help the economy during the bush administration? Oh wait, the economy was on the verge of total collapse... and this policy of increased spending and cutting taxes obviously didn't prevent this from happening... If its such a good idea, then maybe it should have mitigated the economic recession in the first place?

Does it make any sense to do more of what has failed in the past?

I take it you are against stimulus spending, then. So what is your solution to the millions of people who will remain unemployed by the refusal to stimulate the economy? Let them eat cake?

 

[cynic2005]

I take it you are against stimulus spending, then. So what is your solution to the millions of people who will remain unemployed by the refusal to stimulate the economy? Let them eat cake?

I happen to be one of those people. Not only that, but I have a considerable disability (which caused me to lose my job) and no money to pay for health insurance. I cannot therefore, get a diagnosis and disability rating established. So, I am eating lots of cake.
I think the course we must take, is whatever course that helps the most people in the long run. If that means I eat cake, then so be it, so long as the condition of the country gets better in the long run. If the alternate course provides temporary relieve, but plunges the country into further crisis, then what sense is there in taking such a course?

But, I am definitely not an economist, and only have basic understanding of how the economy works. So, I am unsure as to which course is actually the better one in the long run.

 

[Revoltingest]

As John Maynard Keynes aptly said, "The long run is a misleading guide to current affairs. In the long run we are all dead."

That makes him sound a bit like those corporate execs who think only about what their stock price is doing this week. I prefer a longer view....for my old age & my kids' sake.

The wisdom that says we must cut deficits now, is absurd. There is no legitimate economic reason for it.

Is it so absurd? Many economists would disagree with you. Even Mr Keynes proposed only short term deficit spending. Let's both pretend for a moment that we've no agenda, & we're looking at the pros & cons of continued deficit spending.
Pros: It could stimulate the economy by getting people fired up about working & purchasing more. The increased activity could pay down the incurred debt.
Cons: It could fail to stimulate the economy. Now, the incurred debt has added to the government's financial burden, so that either they must raise taxes or cut services. This will cause the private sector to shrink, reducing prosperity. Even the act of deficit spending has costs. The money spent by gov't must come from the private sector (either by taxation, borrowing or dilution by printing fiat curency). This money spent by gov't would've been spent by citizens or businesses, but now it won't be. Who is to say that gov't spends it with greater economic results?

How does anyone know if the 'pros' outweigh the 'cons'. Economists have opinions, but these are not based upon theory which models the real world with any accuracy. (Just look at the diversity of opinion among them.) Their views generally reflect their politics & values, rather than some objective science. Paul Krugman is a perfect example, given his NYT pieces.

President Roosevelt made the same mistake we are all making now. In 1937, government stimulus spending was cut back, and unemployment began to rise again. Inflation hawks are squawking because they have a belief in the nigh-divinity of a laissez-faire market. The battle of the flaws of laissez-faire economics was already won during the Great Depression. Unfortunately, as a society, we are suffering from collective amnesia, and we do not have a strong social liberal or socialist tradition to save us this time.

Capitalism is not without flaws. That is true of any economic system, so the issue should be about coping with the flaws & minimizing the problems. I've posted it before, so I won't go into it in detail again, but the financial crisis was precipitated by the housing bubble & economic downturn. Fed regulation subsidized & required risky lending practices, which made the economy vulnerable to any slight downturn. That happened, & Fannie Mae & Freddie Mac (both gov't created corporations & the largest of all lending institutions) were the first to fail. We had a very distorted & dysfunctional marketplace for lending. Note that commercial lending didn't see gov't imposed lending to marginal borrowers, so while it has also been bitten by the downturn, its crisis is only just now beginning.

 

[Sunstone]

Pros: It could stimulate the economy by getting people fired up about working & purchasing more. The increased activity could pay down the incurred debt.

If it's genuine stimulus spending, then it increases demand. The increased demand increases production of goods and services, reduces excess capacity, and lowers unemployment. Tax revenues increase because, among other things, people have paychecks again with which to pay taxes.

Cons: It could fail to stimulate the economy.

If it's genuine stimulus spending, it won't fail to stimulate the economy. The only questions are how much will it stimulate the economy and will that be enough? But even the pathetic and timid stimulus bill of 2009 stimulated the economy somewhat because it contained a little genuine stimulus spending, albeit not enough.

How much is enough? Ideally, the government should spend enough to make up for lost demand. So, if 500 billion has been lost from the economy, the government should spend 500 billion to create the level of demand that was lost from the economy.

Please do not neglect to mention what really happens if the economy isn't stimulated: massive unemployment. Millions or tens of millions of people out of work. Suffering and misery on a huge scale.

Now, the incurred debt has added to the government's financial burden, so that either they must raise taxes or cut services.

If the stimulus works then you can pay off the debt using the increase in tax revenues that comes from an expanding economy.

This will cause the private sector to shrink, reducing prosperity.

No it won't.

This money spent by gov't would've been spent by citizens or businesses, but now it won't be.

If that statement were remotely true, then why aren't citizens and businesses spending that money right now? What are they waiting for, if stimulus is not needed?

Their views generally reflect their politics & values, rather than some objective science.

Some economists are significantly better at accurately predicting economic events than other economists. In general, those economists calling for an end to stimulus spending and a focus on deficit reduction have a poor track record at predicting economic events. Most of them, for instance, even missed predicting the housing bubble. Why trust them to do better now?

 

[Revoltingest]

If it's genuine stimulus spending, then it increases demand. The increased demand increases production of goods and services, reduces excess capacity, and lowers unemployment. Tax revenues increase because, among other things, people have paychecks again with which to pay taxes.

I agree that that is the intent & that it's a possible outcome. But as we see so far, it's not happening yet. It is also possible that despite the best of intentions it might not work. In that case, we have more debt & nothing to show for it.

If it's genuine stimulus spending, it won't fail to stimulate the economy. The only questions are how much will it stimulate the economy and will that be enough?

But what is "genuine stimulus spending"? Politicians make these choices, not economists familiar with business. Moreover, is money spent this way by gov't more productive than leaving it in the hands of the private sector? It would be there, were it not for government's borrowing, taxing or dilution by printing. I've never seen evidence that this cost vs benefit analysis has been accurately calculated. It would be great if it worked & its use could be limited to such emergencies. But I fear that government economic strategy is always: When times are good, spend! When times are mediocre, spend! When times are bad, spend! When times are really really really bad, spend spend spend! At least this strategy has the support of both parties.

But even the pathetic and timid stimulus bill of 2009 stimulated the economy somewhat because it contained a little genuine stimulus spending...

I agree with this much. Bush & Obama didn't use stimulus or bail-outs wisely. Greater effect per dollar was available. But if they failed to act wisely then, why would it be any different now? It could be even worse, given the more panicy do-it-now mood in Congress.

How much is enough? Ideally, the government should spend enough to make up for lost demand. So, if 500 billion has been lost from the economy, the government should spend 500 billion to create the level of demand that was lost from the economy.

That's a reasonable bench mark, but since the theory is that consumers & businesses must be motivated to buy & produce more, it could require far more or even less money. There just aren't any economic models to predict this. It's just spend & spend until it works. But what if the net effect is to harm the economy? Most European countries now find austerity preferable, so I'm finding myself in the company of socialists....which is OK...many of my friends are.

Please do not neglect to mention what really happens if the economy isn't stimulated: massive unemployment. Millions or tens of millions of people out of work. Suffering and misery on a huge scale.

I agree, which is why I'm greatly concerned about things getting worse. But I don't see that continued deficit spending is improving the situation. It could be making things worse. It appears to have done so already, given that debt is up & there's no recovery yet. Things are definitely much worse here in Michigan.

If the stimulus works then you can pay off the debt using the increase in tax revenues that comes from an expanding economy.

Yeah, I cited that. But what if it doesn't work? How is the increased debt repaid? What are the effects of increasing taxation or reducing services during a national miasma?

No it won't.

You could be right if the economy is recovering. But I maintain that the private sector will shrink if wealth is taken out of it in a stagnating economy, be it by taxation or borrowing. It stands to reason that if people have less money to spend, & if business sees a lower ROI, then there's good reason to reduce production & investment. That's what I'd do.

If that statement were remotely true, then why aren't citizens and businesses spending that money right now? What are they waiting for, if stimulus is not needed?

I & everyone else I know are spending all that we have. None of us have any savings or stock anymore. ( And I can't talk my daughter into dropping out of school so that I can use her college fund. Ungrateful kids!) If more is taken from us in taxes (as Obama is proposing), then we stop paying things like loan payments, building maintenance, property taxes,etc. If more is taken by borrowing, then my interest costs (adjustable) go up & I have to cut back on other expenses. The government cannot create the money they spend out of thin air - it comes from someone, & that someone is us.

Some economists are significantly better at accurately predicting economic events than other economists. In general, those economists calling for an end to stimulus spending and a focus on deficit reduction have a poor track record at predicting economic events. Most of them, for instance, even missed predicting the housing bubble. Why trust them to do better now?

Who has a good track record at predicting the results of massive deficit spending? The housing bubble was predicted. Congress was warned. They declined to take it seriously.

Ron Paul was warning Congress of the housing bubble long before it burst. | The Panic News

Alan Greenspan - Wikipedia, the free encyclopedia

Media Myths: The Housing Bubble Is Bursting

Bubble Meter - A housing bubble blog: Who caused the housing mess? It depends on how you vote.

Economists are like priests & imams. That they believe what they believe, they study what they believe, & they always come away firmly believing what they already believe. Don't trust'm too much. Pay more attention to the ones who make unpopular warnings. Avoid economists who give opinions without cost v benefit analysis you can understand.

I proposed a partial solution on other posts, but it hasn't gained any traction. Government should:
1) Allow businesses to renegotiate loans without tax consequences. This won't cost much, since many businesses don't do this because they can't afford to pay the associated income taxes. It's cheaper to lose the assets to the bank & close the business - not a taxable event as long as the bank still claims you owe it.
2) Ease off on regulation where health & safety aren't affected. This would help manufacturing greatly.
3) States: Reduce excessive real estate transfer taxes so that property can be sold for a higher & better use.
4) States: Recognize overassessments & adjust property taxes without having to file expensive appeals.
5) Stop taking money from Peter to give to Paul as stimulus.
6) Stop making loans to start-up companies in industries with a high newbie failure rate, eg, $529 million to Fiskar Automotive (a luxury sports car company).

 

[cynic2005]

As a result, the net worth of the average citizen is now at an all-time high, well exceeding what Americans enjoyed during the stock bubble years of the late ’90s and early 2000s.

In order for an average to be accurate, the distribution of wealth must resemble a bell-shaped curve. However, the distribution of wealth in America probably does not reflect a bell curve, as the rich are getting richer and the poorer are getting poorer. In addition, there are large amounts of wealth distributed to a small few, so one can reasonably presume that the distribution is skewed and poorly reflects a bell shaped curve distribution.

Sidenote: a bell-shaped curve is the result of random distribution (see central limit theorem). If we threw a die 100 times and recorded each number the die landed on, then the distribution of numbers should reflect a bell shape curve, with more numbers showing up than others and the top of the bell being close to the average. Sometimes in statistics, we assume a bell-shaped curve distribution, but to assume this without actually checking may result in the skewing of averages or other calculations. Since we do not have a free market capitalist economy but "cronyism," not to mention variables such as inherited wealth, we could reasonably assume that a lack of randomness exists when it comes to the distribution of wealth amongst the population.

If the distribution is skewed, there are two things you can do: eliminate the outliers (i.e., data that is extremely far from the average or median) from your calculations (i.e. the most wealthiest people), or use the median. These two things would help in getting an accurate picture of the "net worth of the average citizen." If you ignore the outliers (i.e., the most wealthiest people) either intentionally or unintentionally, this would in effect, make it appear as though the "net worth of the average citizen" is at an all-time high, when in fact the average citizen may be getting poorer and poorer as time goes by.

This "statistic" may be the result of incompetence or intentional deception in my opinion and should be further checked for accuracy. In the case of wealth, you should be considering a median in addition to the average for increased accuracy. The article should have cited statistical studies for this "statistic" to provide further credibility (which it did not) and give clear numbers and estimates instead of an ambiguous statement which poses as a statistic.

I don't trust statistics that are reported by news outlets (or government agencies), because from what I have seen any information going in and out of such agencies are the most susceptible to inaccuracy. For example, CNN polls are by default inaccurate because they reflect only the opinions of CNN viewers, and among CNN viewers, those who are willing to voice their opinion, answer the phone, etc. These CNN viewers are not representative of the average American. However, CNN goes on using such polls to sway public opinion.

As had been said by Mark Twain, "There are three types of lies: lies, damned lies, and statistics."

 

[Revoltingest]

....the rich are getting richer and the poorer are getting poorer. In addition, there are large amounts of wealth distributed to a small few.....

One reason this happens is that federal, state & local governments erect barriers to entry for the poor & others who would like to start a business. Example: Hair braiders in LA were required to have a cosmetology license, even though they used no chemicals...just manually braiding hair. (The IJ successfully fought this.) State governments will audit small businesses, disingenuously looking for owners whom they can claim have too few clients to be independent contractors. by declaring them to be employees, the clients can be hit with payroll taxces & fines. Worker Compensation Insurance & Unemployment Insurance laws make it difficult for a newbie contractor to find clients, since much liability is imposed upon the client. Easing up on the barriers of starting a business would stimulate the economy, with no real cost I can think of.
Caution! Cynicism to follow:
But this won't fit into a sound bite, nor does it justify increasing taxes or regulatory power. What use is that to a politician?