How Does Deficit Reduction Make Economic Sense at This Time?

[Wandered Off]

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?

Plus it might provoke the lobbyist overlords.

 

[Darkness]

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.

You have to understand the context in of the Great Depression, and of you think about the economy in terms of years, children are suffering since unemployment benefits have not be renewed.

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.

Even my idol, Paul Krugman, only wants to continue fiscal stimulus only for a couple years. Everybody agrees that we need to cut long-term spending. One of the main problems is getting health care spending under control.

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?

We should use fiscal stimulus to: repair infrastructure, build a green economy and extend unemployment. With the exception of extending unemployment, these are social goals that we should be working on anyway, and it is better to enact industrial policy when it will decrease the unemployment rate. I whole-heartedly assent that was merely better than nothing at all, yet my family still thinks I am a staunch Obama supporter. :sarcastic

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.

Mr. Krugman is not necessarily bound by ideology. He is kind of a socialist, but he is an staunch supporter of free trade, as opposed to free trade.

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.

Let's not beat a dead horse.

 

[Darkness]

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.

You bring a tear to my eye. I always thought you were against deficit spending.

 

[Terrywoodenpic]

The debt has come from bailing out the Banks and financial institutions with Government money.

The bale out was due to the banks bad debts, bad lending and bad investments.
All bale out money should be repaid by the banks,
No bonuses should be paid till it has been repaid.
bank salaries should be government controlled, ill the debt is repaid.
If banks do not cooperate the Government should take over ownership.
re-sell the banks to new investors when things turn around.

If BP can not pay dividends to innocent pension investors.
The banks should certainly not be able to pay bonus money.

 

[Revoltingest]

You have to understand the context in of the Great Depression, and of you think about the economy in terms of years, children are suffering since unemployment benefits have not be renewed.

I do think of it that way. But it's not known whether results of deficit spending will improve their lot or harm it.

Even my idol, Paul Krugman, only wants to continue fiscal stimulus only for a couple years. Everybody agrees that we need to cut long-term spending. One of the main problems is getting health care spending under control.

Perhaps he says a couple years now, but if in 2 years we're still stagnating, how much longer then? I just don't hear any quantitative analysis or accounting for the risks involved. He ventures an opinion without a cogent argument.

We should use fiscal stimulus to: repair infrastructure, build a green economy and extend unemployment. With the exception of extending unemployment, these are social goals that we should be working on anyway, and it is better to enact industrial policy when it will decrease the unemployment rate. I whole-heartedly assent that was merely better than nothing at all, yet my family still thinks I am a staunch Obama supporter. :sarcastic

But where is the analysis that those are the best ways to stimulate the economy? And what of the effect of taking that money from the private sector, which also would've been spending it? An objective argument could be made that this is the best course, but where is it?

Let's not beat a dead horse.

But the horse really wants it!

If deficit spending, stimulus & bail-outs are so successful, then why are things stagnating or getting even worse?
http://apnews.myway.com/article/20100701/D9GMF6SG2.html
This approach started under Bush & has been continued by Obama. His stable of economic gurus says we need even more. (Powerful their faith is.) It concerns me that this technique has failed over the last couple years, yet this continued failure steels their resolve to do exactly the same thing with no end in sight. It resembles the addicted gambler who desperately imagines that a big win will save him from his prior losses. Instead of cold analysis, we hear plaintive concern for the unemployed & downtrodden, as appealing to empathy & emotion can substitute for rational thought.

And then we have argument by demonization:
http://www.sltrib.com/sltrib/opinion/49842961-82/depression-economy-governments-spending.html.csp
An excerpt from Mr Krugman's analysis:
"So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times. And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."
So he believes that the imposition of suffering is the secret motive of European leaders. Hmmmm.....maybe I can win a Nobel Prize for my limericks.

 

[Mercy Not Sacrifice]

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?

It is a major understatement to say that it doesn't make sense. The deficit hawks are proposing an economic policy that is reckless, stupid, illogical, and dangerous.

What I find funny about the people on the Far Right who are so militantly opposed to deficit spending now, on unemployment benefits to save people's quality of life, is that they are the VERY SAME ONES who were militantly in favor of deficit spending under Bush, on weapons designed to kill and destroy. They are hypocrites of the highest magnitude and would do us all a favor to just shut up.

I saw two key points in this thread, both of which I agree with.

First of all, the president is using Keynesian economics to try to prop this economy back up. At a cost to the deficit, so far it has worked. It is foolish and naive to think that the same markets that went down a couple years ago are going to lead us out, because as that Keynes quote goes, "in the long run, we are all dead."

Second, the increased tax receipts will greatly relieve this portion of the national debt crisis. It's called an investment: You gotta spend some to make some. Just look at the results of such an approach for evidence. General Motors is out of bankruptcy. The stimulus package is more than halfway paid for. Hiring-vs-layoff numbers have consistently improved since the stimulus bill was passed. Once this is all taken care of, the economic recovery efforts will represent only a tiny portion of the federal deficit.

Let's roll back the clock even before FDR and the mini-recession. After the massive crash of 1929, Hoover took the classical approach of letting the markets "correct themselves." Well, we saw how well they did that! Had he stepped in right away, who knows if the Great Depression might have been much less severe?

 

[Darkness]

I do think of it that way. But it's not known whether results of deficit spending will improve their lot or harm it.

It is also not known if deficit reduction will lead to a double-dip recession, but libertarian/conservative economists are willing to take that risk.

Perhaps he says a couple years now, but if in 2 years we're still stagnating, how much longer then? I just don't hear any quantitative analysis or accounting for the risks involved. He ventures an opinion without a cogent argument.

Paul Krugman gets into more quantitative analysis on his blog, from time-to-time, but in general, his column is written for laymen.

But where is the analysis that those are the best ways to stimulate the economy? And what of the effect of taking that money from the private sector, which also would've been spending it? An objective argument could be made that this is the best course, but where is it?

Unemployment insurance, for example, is analysed to have a fiscal modifier around 1.5, which was touched on in Joseph E. Stiglitz's book, Freefall, that came out early this year. Additionally, crowding out is minimised in recession because of an increase in savings and low-capacity utilisation.

But the horse really wants it!

Is it bad that my mind thought of necrophilia, when you said that?

 

[Revoltingest]

It is also not known if deficit reduction will lead to a double-dip recession, but libertarian/conservative economists are willing to take that risk.

Either way is a risk. The issue is to evaluate each & determine the best approach.

Paul Krugman gets into more quantitative analysis on his blog, from time-to-time, but in general, his column is written for laymen.

How did he do predicting the burst of the housing bubble? Did he recognize the instabilities created by Fannie's & Freddie's expansion of lending to marginal borrowers?

Unemployment insurance, for example, is analysed to have a fiscal modifier around 1.5, which was touched on in Joseph E. Stiglitz's book, Freefall, that came out early this year. Additionally, crowding out is minimised in recession because of an increase in savings and low-capacity utilisation.

I'm unfamiliar with these terms.

Is it bad that my mind thought of necrophilia, when you said that?

It's interesting.

 

[Darkness]

Either way is a risk. The issue is to evaluate each & determine the best approach.

Indeed. I do respect George Osborne for sticking to his principles and at least attempting to come up with a deficit reduction plan that does not fall to heavily upon the poor.

How did he do predicting the burst of the housing bubble? Did he recognize the instabilities created by Fannie's & Freddie's expansion of lending to marginal borrowers?

I am not entirely sure if he talked about Fannie's and Freddie's expansion. I know in 2006 he was predicting a housing collapse, but I do not know the details beyond that. I definitely know that he does not believe the CRA is the main cause of the collapse, but nobody can argue that lending to marginal borrowers wasn't the main cause.

I'm unfamiliar with these terms.

Fiscal multiplier is basically the same thing as another banking term, money multiplier. The idea of both is that money can do more than one thing at a time and thus it acts as if there was more money in the money supply. For example, when you deposit your money in a bank, it is as if the money is in the bank, but it can also be lent out, so it's like there is more money. Does that make sense? I am tired.

Crowding out means that public spending is soaking up what would be spent/borrowed by the private sector, and low-capacity utilisation means that private (potentially public) businesses are not operating at optimal employment or production.

 

[Revoltingest]

I am tired.

Same here....nighty night!

 

[Magic Man]

It is a major understatement to say that it doesn't make sense. The deficit hawks are proposing an economic policy that is reckless, stupid, illogical, and dangerous.

The thought process behind "lower taxes and reduce the deficit" always boggles my mind.

 

[Darkness]

It is a major understatement to say that it doesn't make sense. The deficit hawks are proposing an economic policy that is reckless, stupid, illogical, and dangerous.

The deficit hawks believe that cutting deficits with reassure the securities markets, but honestly, nobody knows how they are going to react. I tend to think that the securities markets understand that fiscal stimulus in the short-term is not a reason to worry about the long-term health of an economy, especially in a developed state that does not hold the Euro. It is hard to tell in economics, because so much is a self-fulfilling prophecy (bank runs being the prime example).

What I find funny about the people on the Far Right who are so militantly opposed to deficit spending now, on unemployment benefits to save people's quality of life, is that they are the VERY SAME ONES who were militantly in favor of deficit spending under Bush, on weapons designed to kill and destroy. They are hypocrites of the highest magnitude and would do us all a favor to just shut up.

Libertarians, who are considered right-wing, were opposed to the war in Iraq, so it is unfair to blame the Right for these problems. It is better to blame the right-wing elected officials.

First of all, the president is using Keynesian economics to try to prop this economy back up. At a cost to the deficit, so far it has worked. It is foolish and naive to think that the same markets that went down a couple years ago are going to lead us out, because as that Keynes quote goes, "in the long run, we are all dead."

For the record, I believe the Obama administration did a hatched job to Keynesian deficit spending, and it was really only better than nothing. The tax cuts, which accounted for about 30 per cent of the whole, were a disaster and honestly, the rest was spent poorly. Like I said earlier, the best reactionary form of Keynesian deficit spending is paying unemployment insurance.

Second, the increased tax receipts will greatly relieve this portion of the national debt crisis. It's called an investment: You gotta spend some to make some. Just look at the results of such an approach for evidence. General Motors is out of bankruptcy. The stimulus package is more than halfway paid for. Hiring-vs-layoff numbers have consistently improved since the stimulus bill was passed. Once this is all taken care of, the economic recovery efforts will represent only a tiny portion of the federal deficit.

The ultimate goal of deficit spending is to close that gap:

Let's roll back the clock even before FDR and the mini-recession. After the massive crash of 1929, Hoover took the classical approach of letting the markets "correct themselves." Well, we saw how well they did that! Had he stepped in right away, who knows if the Great Depression might have been much less severe?

Well, you cannot say that Herbert Hoover's policy was to let market's correct themselves. He raised taxes and cut fiscal spending, so in our modern age he might be considered half-republican and half-democrat.