Eurogeddon picking up speed?

[RandBlade]

Forget the French elections. As idiotic as it ever is to elect an out and out Socialist, even the French right are too socialist for reality. But that isn't the location of the previously slow-motion car crash.

The real and completely foreseeable disaster is the election in Greece. Besides being a signpost once more as to why Proportional Representation is an idiotic way to elect a government, the Greek people have voted against forming one. The vote has been so split that it doesn't seem possible any government can form, let alone a pro-austerity government. There have to be massive question marks now over the ability of Greece to even function as a state and the whole Euro crisis is possible entering its most turgid time.

Scarily enough, we now no joke have a Nazi party in the Greek Parliament.

[Loki]

Would you prefer Greece had a FPTP system, and got a majority government despite the largest party getting 19% of the vote?

[CitizenCain]

No, that sounds like proof that FPTP systems are fundamentally broken.

What else ya got?

[GGT]

[snip]....The vote has been so split that it doesn't seem possible any government can form, let alone a pro-austerity government.

I'll leave elections and proportional representation to your other thread....and ask how that pro-austerity thing is working out for the UK? You're back in recession, unemployment is growing while "growth" isn't. Too much too fast? Gotta Plan B?

There have to be massive question marks now over the ability of Greece to even function as a state and the whole Euro crisis is possible entering its most turgid time.

Eurogeddon, what an interesting word . Is the European Experiment a failure, as some have suggested? Does it just need to expel a few rotten apples from the bunch and restructure? I get the distinct impression that many Greeks want out of the EU and return to their own currency...and many in the EU want Greece out because their political economy is poisoned. What about the PISs in PIGS?

[Khendraja'aro]

Well, what alternatives do the Greek have? Their state is alive only due to the massive influx of money from the EU.

If those guys think it's bad now, they'll be shocked to see what a bankruptcy will do to them.

[RandBlade]

I'll leave elections and proportional representation to your other thread....and ask how that pro-austerity thing is working out for the UK? You're back in recession, unemployment is growing while "growth" isn't. Too much too fast? Gotta Plan B?

I'm of the opinion that it's going very well and TINA - There Is No Alternative.

Yes we're in technical recession. But we're not facing meltdown and ruin. If anything I'd go faster and further, but oh we'll. Greece is ruined and there are no easy answers.

Eurogeddon, what an interesting word . Is the European Experiment a failure, as some have suggested?

I think the euro has failed, but the cost of breaking it up may be too severe.

Does it just need to expel a few rotten apples from the bunch and restructure? I get the distinct impression that many Greeks want out of the EU and return to their own currency...and many in the EU want Greece out because their political economy is poisoned. What about the PISs in PIGS?

Portugal, Italy, Ireland and Spain have their own issues but nowhere as severe as Greece. So too does France now.

[GGT]

I'm of the opinion that it's going very well and TINA - There Is No Alternative.

Yes we're in technical recession. But we're not facing meltdown and ruin. If anything I'd go faster and further, but oh we'll.

How would faster and further austerity translate into faster and further growth, and climbing out of a double-dip recession? Your first "technical" double-dip for decades (correct?). That's a serious question, btw. I'm curious how you'd write the hypothetical scenario playing out in real time. Not to convince policy-makers, since that trajectory has enough advocates.....but how you'd convince your nation's citizens.

Greece is ruined and there are no easy answers.
I think the euro has failed, but the cost of breaking it up may be too severe.
Portugal, Italy, Ireland and Spain have their own issues but nowhere as severe as Greece. So too does France now.

Sorry, but all I can think of right now is a childhood song about Greecy [sic] grimy gopher guts.

[Loki]

Despite the strawmen put forth by Krugman et al., the goal of austerity is not short-term growth; the goal is to avoid imminent economic collapse. Growth policies will do really well when your country is no longer able to borrow money and faces a complete meltdown.

[GGT]

Despite the strawmen put forth by Krugman et al., the goal of austerity is not short-term growth; the goal is to avoid imminent economic collapse. Growth policies will do really well when your country is no longer able to borrow money and faces a complete meltdown.

Thank you for your interjection, professor Loki. But I'm more interested in Rand sharing his perspective. He can do that without resorting to baiting or trolling the poster asking the question.

The UK has been engaged in the kind of austerity depth and timing that many in the US advocate. What might work for the UK may not work in the US, because our size and scale are vastly different. (Not to mention that USD is still considered the world's reserve currency.)

[wiggin]

Despite the strawmen put forth by Krugman et al., the goal of austerity is not short-term growth; the goal is to avoid imminent economic collapse. Growth policies will do really well when your country is no longer able to borrow money and faces a complete meltdown.

There's a huge difference between austerity being used to avert immediate fiscal doom (though, to be honest, it rarely works even then) and it being used to deal with a short term fiscal crisis coupled to long term fiscal issues. Countries like Greece are not the same as countries like the UK or France (or Germany). Greece is flat-out insolvent, and it's obvious that default is effectively the only way to get around it. Since default kicks you out of bond markets, it forces an immediate balancing of budgets (or significant inflation, which works out the same way by eroding incomes). Of course, in Greece, they did it in a complicated way because of the mess with being in a currency union, but that's essentially what is going on. Countries facing near-Greece catastrophes (e.g. Ireland) might be able to avert contagion by proactive austerity to reassure bond markets.

But that's hardly the same question facing major developed economies today. Germany ruthlessly suppresses their own wages and consumption in order to drive their export market, and they push for significant fiscal tightening in the absence of any real concern about their solvency. The UK pushed for very painful cuts without an attack on gilts (or even a hint thereof). This isn't to say that the fiscal gap brought about by the recession(s) wasn't quite significant and shouldn't be addressed by a sensible medium-term budget plan and reform to entitlements. And it doesn't mean that an intelligently targeted set of reforms to bloated programs couldn't help close the fiscal deficit without significantly hurting a recovery. In fact, those are both great ideas and I think the UK has come closer to striking this balance than other austere economies in Europe. But it does mean that your claim is a misleading one - austerity, by and large, is not being used to avert imminent collapse of an economy.

Growth is important, but so is fiscal discipline. At the end of the day, policy should be crafted to pare down unnecessary or bloated programs in the short term, provide useful stimulus in the short term coupled with growth-enhancing reforms for the future, and make a credible (and binding) budget plan for the medium term to close the fiscal gap. This solves your problem of growth, provides modest support for immediately addressing fiscal concerns, and reassures bond markets about your long term solvency. Granted, few (if any) countries have really managed to do this, but it's definitely the best policy choice.


If you look at a chart of US gov't revenues vs. expenditures, it's obvious that a huge portion of the fiscal gap is due to falling-off revenues during the recession that are only now starting to recover. Yes, spending increased, and moderately above trend growth, but the really dramatic change was to revenue. Slashing expenditures will only get you so far in closing that gap - you need revenue to fill it out, and that requires growth, employment, etc.

[earthJoker]

Besides being a signpost once more as to why Proportional Representation is an idiotic way to elect a government, the Greek people have voted against forming one. The vote has been so split that it doesn't seem possible any government can form, let alone a pro-austerity government.

I don't know of any government (executive) that is voted proportionally, it's always the parliament that is voted proportionally. There are some countries that have - let's say - suboptimal ways to form a cabinet, but this has little to do with the voting system of the parliament. A majority voting system may make up for flaws in the way the cabinet is formed.

[GGT]

....Of course, in Greece, they did it in a complicated way because of the mess with being in a currency union, but that's essentially what is going on. Countries facing near-Greece catastrophes (e.g. Ireland) might be able to avert contagion by proactive austerity to reassure bond markets.

Convince me. Ireland is in dire straits, cutting and slashing, acting like the "red-headed step child" of the EU. Bond markets don't seem to buy their team-player attitude, no matter how hard they try.

[snip]I think the UK has come closer to striking this balance than other austere economies in Europe. But it does mean that your claim is a misleading one - austerity, by and large, is not being used to avert imminent collapse of an economy.

Growth is important, but so is fiscal discipline. At the end of the day, policy should be crafted to pare down unnecessary or bloated programs in the short term, provide useful stimulus in the short term coupled with growth-enhancing reforms for the future, and make a credible (and binding) budget plan for the medium term to close the fiscal gap. This solves your problem of growth, provides modest support for immediate restructing, and reassures bond markets about your long term solvency. Granted, few (if any) countries have really managed to do this, but it's definitely the best policy choice.

Didn't the US start out on the right path, even though the amount was too small? Stimulus can be useful, even crucial, even if it drives up debt/deficit in the short-term. Seems to me the fundamental problems began when we had a surplus and a "balanced" budget, but didn't look at the bigger future picture, and started cutting taxes...instead of making fundamental changes.

Who in their right mind cuts taxes during two Wars, while some 80 million Baby Boomers are hitting retirement age, and our national infrastructure is hovering on extinction?

[Loki]

There's a huge difference between austerity being used to avert immediate fiscal doom (though, to be honest, it rarely works even then) and it being used to deal with a short term fiscal crisis coupled to long term fiscal issues. Countries like Greece are not the same as countries like the UK or France (or Germany). Greece is flat-out insolvent, and it's obvious that default is effectively the only way to get around it. Since default kicks you out of bond markets, it forces an immediate balancing of budgets (or significant inflation, which works out the same way by eroding incomes). Of course, in Greece, they did it in a complicated way because of the mess with being in a currency union, but that's essentially what is going on. Countries facing near-Greece catastrophes (e.g. Ireland) might be able to avert contagion by proactive austerity to reassure bond markets.

Just because there hasn't been a run on certain country's currencies yet doesn't mean there wouldn't be if they continued their irresponsible fiscal policies. You're right that it's too late for a country like Greece. But it's not too late for Portugal, Spain, and Italy. Any country that's at the border between solvency and insolvency must choose a policy of austerity or it will face dire consequences. Perhaps you and Krugman believe that every single government on the Mediterranean is stupid and destroying their electability for no reason, but that's a pretty odd assumption to hold.

The problem is less pronounced for Germany and France, but they're also the top players in the euro-zone, and investors are already wary of the euro. These countries have to have their house fully in order for the markets to trust in their ability to bail out weaker members. I don't think you seem to realize how rapid an economic collapse can be once the markets lose faith in a currency. An extra year of a small recession is preferable to even a 10% chance of a euro-zone collapse.

Growth is important, but so is fiscal discipline. At the end of the day, policy should be crafted to pare down unnecessary or bloated programs in the short term, provide useful stimulus in the short term coupled with growth-enhancing reforms for the future, and make a credible (and binding) budget plan for the medium term to close the fiscal gap. This solves your problem of growth, provides modest support for immediately addressing fiscal concerns, and reassures bond markets about your long term solvency. Granted, few (if any) countries have really managed to do this, but it's definitely the best policy choice.

You're assuming that extra government spending addresses the reasons businesses don't want to invest more money. If anything, it creates a climate of uncertainty about the long-term stability of the economy, which makes businesses less likely to make long-term investments. You're also assuming that the spending can be cut once the economy improves. History suggests otherwise.

If you look at a chart of US gov't revenues vs. expenditures, it's obvious that a huge portion of the fiscal gap is due to falling-off revenues during the recession that are only now starting to recover. Yes, spending increased, and moderately above trend growth, but the really dramatic change was to revenue. Slashing expenditures will only get you so far in closing that gap - you need revenue to fill it out, and that requires growth, employment, etc.

Are you serious? Spending is up a trillion dollars from 2008. That's an increase of over 30%. How much did GDP grow during that time? 29%?

[GGT]

US spending is up because of (1) WARS, (2) aging demographics + longer longevity expectations + high costs of medical care, (3) crumbling infrastructure that's more expensive to replace now than it would have been to update/maintain years ago. *(4) The biggest and deepest financial crisis since the Great Depression.*

Comparing these costs to % of GDP, or GDP growth, is an endeavor without a policy.

[wiggin]

Convince me. Ireland is in dire straits, cutting and slashing, acting like the "red-headed step child" of the EU. Bond markets don't seem to buy their team-player attitude, no matter how hard they try.

Ireland has a fundamentally decent economy but their fiscal situation is a mess just because they backed their banking sector which was a huge chunk of GDP. They have more or less met their fiscal targets (which has given them lots of controversy-free access to IMF and EU funds), and they don't have anywhere near the same level of popular discord over the plans. Austerity is really the only way to go to close their fiscal gap - they can't grow out of a national debt that ballooned from ~25% of GDP to ~120% of GDP over the course of a few years. That needs austerity to make right, followed by a rebalancing of the economy.

Didn't the US start out on the right path, even though the amount was too small? Stimulus can be useful, even crucial, even if it drives up debt/deficit in the short-term. Seems to me the fundamental problems began when we had a surplus and a "balanced" budget, but didn't look at the bigger future picture, and started cutting taxes...instead of making fundamental changes.

Er. The US did some parts right but lots of parts wrong. The biggest failure was a lack of serious reform to the entitlements programs or any amount of credible medium-term budget planning. The stimulus was okay - certainly large, though hardly well targeted - but that's all about I can say for it. US monetary policy has been far better than fiscal policy in the crisis. I'd say it's better than, say, Germany, but I'm not really sure it's better than a place like the UK. Both have their flaws, but the US doesn't stand out as exemplary in this area, I'm afraid.

Just because there hasn't been a run on certain country's currencies yet doesn't mean there wouldn't be if they continued their irresponsible fiscal policies. You're right that it's too late for a country like Greece. But it's not too late for Portugal, Spain, and Italy. Any country that's at the border between solvency and insolvency must choose a policy of austerity or it will face dire consequences. Perhaps you and Krugman believe that every single government on the Mediterranean is stupid and destroying their electability for no reason, but that's a pretty odd assumption to hold.

I have no problem with austerity in seriously iffy economies, like Greece, Ireland, and Portugal. Spain frankly doesn't need it - what they need is labor market reform and a number of other fixes, but they frankly have a pretty reasonable debt level. Italy has a worse debt issue, but has shown itself to be able to manage - though not well - high debt loads for fairly sustained periods. They need growth and reforms more than austerity, though I think a case can be made both ways here.

I think you're agreeing with me in principle (though perhaps not specifics), though. My only problem was you characterization of austerity only being used for imminent economic collapse. It's being widely embraced around the developed world for far more broad applications, and it's very questionable whether those applications are well suited to harsh austerity.

The problem is less pronounced for Germany and France, but they're also the top players in the euro-zone, and investors are already wary of the euro. These countries have to have their house fully in order for the markets to trust in their ability to bail out weaker members. I don't think you seem to realize how rapid an economic collapse can be once the markets lose faith in a currency. An extra year of a small recession is preferable to even a 10% chance of a euro-zone collapse.

It's a lot more than a single year. Some of these countries can enter lost decades or longer if they clamp down on fiscal policy willy-nilly. And the countries with the most leeway (e.g. Germany) are being the least flexible.

You're assuming that extra government spending addresses the reasons businesses don't want to invest more money. If anything, it creates a climate of uncertainty about the long-term stability of the economy, which makes businesses less likely to make long-term investments. You're also assuming that the spending can be cut once the economy improves. History suggests otherwise.

For your first point, I think that reasonable reforms - not just stimulus - are decent ways to reassure businesses without austerity. For the second, the easiest way to have spending cut during better times is to have automatic stabilizers (e.g. unemployment insurance) which provide immediate stimulus and naturally go away when the economy picks up. Furthermore, I'm well aware that Congress is awful at sticking to budgets, but certainly some countries have been able to do it.

Are you serious? Spending is up a trillion dollars from 2008. That's an increase of over 30%. How much did GDP grow during that time? 29%?

US federal spending had two years of large increases - about 9% in 2008 compared to 2007 and about 18% increase in 2009. In the subsequent 3 years it's been flat or falling. Large, agreed, though not as large as you might think - from 2002 to 2007, federal spending increased by 8%, 7.5%, 6%, 8%, 7.5%, and 3% - far above GDP growth and not much smaller than the 2007-2008 increase. So, yes, some stimulus, but not a huge proportion compared to the size of the economy. I'm not comparing spending increases to GDP growth, but to trend growth in gov't spending. It was running at about 7% before the crisis, and over the period 2008-2012 it is actually lower than that trend spending growth (I think it's about a 37% increase compared to a 40% increase if we were running at 7% a year).

[Loki]

A few general points:

1. Labor-market reforms, removal of guild protections, and increasing the ease of starting and running a business are all more important than either policies of austerity of growth. Unfortunately, most governments (including Greece) don't have the political willpower to implement these reforms. So instead, they go for the low-hanging apple and cut pensions/salaries.

2. You grossly overestimate how much power the government has in stimulating the economy. In a lot of these countries, all government spending does is increase the number of useless jobs, which crowds out private investment and increases future government obligations (due to pensions and other benefits). If the governments were purely concerned with stimulus, they'd put more money in the hands of businessmen and consumers through direct transfers of money, not through new government programs that will never be removed.

3. No one ever claimed that Bush was fiscally responsible. But it's one thing to run up the deficit when you're starting from a surplus and quite another to run it up when you're starting from a ~5% deficit. Either way, tax receipts will not increase by 8% a year after the economy stabilizes, which means the deficit will just keep on growing. We simply cannot maintain anything near current deficit levels over the long term, and yet there's no willpower to either raise taxes or cut spending.

[wiggin]

1. Labor-market reforms, removal of guild protections, and increasing the ease of starting and running a business are all more important than either policies of austerity of growth. Unfortunately, most governments (including Greece) don't have the political willpower to implement these reforms. So instead, they go for the low-hanging apple and cut pensions/salaries.

Those 'low hanging apples' will actually have very bad effects on the economy, when the painful but necessary reforms will have very positive effects. It's apples and oranges, Loki.

2. You grossly overestimate how much power the government has in stimulating the economy. In a lot of these countries, all government spending does is increase the number of useless jobs, which crowds out private investment and increases future government obligations (due to pensions and other benefits). If the governments were purely concerned with stimulus, they'd put more money in the hands of businessmen and consumers through direct transfers of money, not through new government programs that will never be removed.

Who said stimulus needed to be new government programs? I think direct cash transfers is a very reasonable method of stimulus - e.g. temporary tax cuts, built in countercyclical transfers, etc. It's not the only way - there are very reasonable stimulus investments that can have nice effects on short-term employment and long-term growth. Traditionally this has been infrastructure, and it's no secret that the US desperately needs to update its infrastructure - or that it enhances business in the future. But I agree that 'stimulus' that just produces a whole bunch of new entrenched programs is no stimulus at all.

3. No one ever claimed that Bush was fiscally responsible. But it's one thing to run up the deficit when you're starting from a surplus and quite another to run it up when you're starting from a ~5% deficit. Either way, tax receipts will not increase by 8% a year after the economy stabilizes, which means the deficit will just keep on growing. We simply cannot maintain anything near current deficit levels over the long term, and yet there's no willpower to either raise taxes or cut spending.

I agree that the current trend is unsustainable. I just don't think that the stimulus really added too much to that unsustainability. The budget has been largely flat for three years; now that's a pretty decent new trend, wouldn't you say? Look, I'm not making a point about Obama or Bush wrt fiscal rectitude. Obviously both couldn't care less about it. My only point is that gov't revenues are still far below the 'trend' in revenue growth from before the recession, just as GDP is. Spending isn't that much higher. Clearly spending is something that needs to be dealt with in the US, but the glaring shortfall right now is in GDP, employment, and revenue.

[Enoch the Red]

3. No one ever claimed that Bush was fiscally responsible. But it's one thing to run up the deficit when you're starting from a surplus and quite another to run it up when you're starting from a ~5% deficit. Either way, tax receipts will not increase by 8% a year after the economy stabilizes, which means the deficit will just keep on growing. We simply cannot maintain anything near current deficit levels over the long term, and yet there's no willpower to either raise taxes or cut spending.

Right. Overspending when you're running a surplus elicits Chicken Little articles from Krugman. Overspending when you are running an onerous deficit gets you a pat on the back and a stern rebuke to deficit hawks.

But I guess that's your stereotypical Keynesian approach.

[Loki]

Those 'low hanging apples' will actually have very bad effects on the economy, when the painful but necessary reforms will have very positive effects. It's apples and oranges, Loki.

The reforms are more politically painful than the austerity, which is why governments are willing to implement the latter but not the former. It's actually surreal how people talk about Greece needing to choose between austerity and growth, when Greece is doing virtually nothing to become more competitive. The left-wing emphasis on growth is just a veiled attempt at undermining the impetus for reform. Note how Hollande is not only refusing to implement new reforms, but fully intends to remove old ones.

Who said stimulus needed to be new government programs? I think direct cash transfers is a very reasonable method of stimulus - e.g. temporary tax cuts, built in countercyclical transfers, etc. It's not the only way - there are very reasonable stimulus investments that can have nice effects on short-term employment and long-term growth. Traditionally this has been infrastructure, and it's no secret that the US desperately needs to update its infrastructure - or that it enhances business in the future. But I agree that 'stimulus' that just produces a whole bunch of new entrenched programs is no stimulus at all.

Are we talking about the world as it should be or the world at it is? How much out of the trillion is going on infrastructure? And how much of that infrastructure spending is going into the pockets of unions who'll promptly shift some of that money straight to Democratic politicians?

I agree that the current trend is unsustainable. I just don't think that the stimulus really added too much to that unsustainability. The budget has been largely flat for three years; now that's a pretty decent new trend, wouldn't you say? Look, I'm not making a point about Obama or Bush wrt fiscal rectitude. Obviously both couldn't care less about it. My only point is that gov't revenues are still far below the 'trend' in revenue growth from before the recession, just as GDP is. Spending isn't that much higher. Clearly spending is something that needs to be dealt with in the US, but the glaring shortfall right now is in GDP, employment, and revenue.

You, among others, were claiming that the increases in spending would be temporary. Now that this has turned out to be false, you're claiming there's something positive about not increasing the deficit? That's changing the goal-posts and ignoring just how massive the increase in spending has been. What would be reasonable is decreasing spending by a trillion and then increasing it by the rate of inflation. Yes, revenue levels are low, but they'll recover. The spending will never be cut. This is why I oppose new government spending. It would be nice if it was temporary, but it never is.

Right. Overspending when you're running a surplus elicits Chicken Little articles from Krugman. Overspending when you are running an onerous deficit gets you a pat on the back and a stern rebuke to deficit hawks.

But I guess that's your stereotypical Keynesian approach.

Not that I support Keynes, but he did call for running budget surpluses during economic booms. I'd like to see which of the politicians pretending to be Keynesians today will be willing to run that surplus once the economy improves. There are always new programs to fund! They're all social democrats, not Keynesians.

[wiggin]

The reforms are more politically painful than the austerity, which is why governments are willing to implement the latter but not the former. It's actually surreal how people talk about Greece needing to choose between austerity and growth, when Greece is doing virtually nothing to become more competitive. The left-wing emphasis on growth is just a veiled attempt at undermining the impetus for reform. Note how Hollande is not only refusing to implement new reforms, but fully intends to remove old ones.

And the right wing emphasis on crushing austerity as being an effective solution is silly as well. I'm not making a political point, Loki, but a policy point.

Are we talking about the world as it should be or the world at it is? How much out of the trillion is going on infrastructure? And how much of that infrastructure spending is going into the pockets of unions who'll promptly shift some of that money straight to Democratic politicians?

We're talking about policy as it should be. I don't think that ARRA was that great - it wasn't terrible, but it had plenty of waste. You made a sweeping generalization about austerity that was wrong; I corrected you and suggested some better policy alternatives for most of the developed world.

You, among others, were claiming that the increases in spending would be temporary. Now that this has turned out to be false, you're claiming there's something positive about not increasing the deficit? That's changing the goal-posts and ignoring just how massive the increase in spending has been. What would be reasonable is decreasing spending by a trillion and then increasing it by the rate of inflation. Yes, revenue levels are low, but they'll recover. The spending will never be cut. This is why I oppose new government spending. It would be nice if it was temporary, but it never is.

I claimed increases in spending should be temporary. I have consistently called for medium term deficit/debt reduction including budgetary measures passed now to deal with that future. I have also critiqued both Republican and Democratic budget proposals for ignoring the real issues in favor of pet ideas and band-aids.

That being said, the reality of the situation is that we are not out of the woods; we aren't in 'medium term' territory yet, and crushing austerity now would serve no one. Furthermore, budgets have shrunk or been flat for 3 years - I'd say that qualifies as reversing some of the spending increases. As I've already said about three times, we're already below the pre-recession trend in spending; even if that trend was unsustainable, it wasn't an immediate end-of-the-economy concern but a much longer term issue. That's not even taking into account broader measures of gov't spending - given the states rapidly slashing spending, overall gov't spending hasn't increased nearly as much as pre-crisis trend.

I am not moving any goalposts or being dishonest in any way. I think I've consistently advocated a fairly clear position.

Not that I support Keynes, but he did call for running budget surpluses during economic booms. I'd like to see which of the politicians pretending to be Keynesians today will be willing to run that surplus once the economy improves. There are always new programs to fund! They're all social democrats, not Keynesians.

I think that in principle we should run budget surpluses (or, rather, keep deficits as a % of GDP significantly below real GDP growth rates) during good times. I agree that politicians won't do it - but that is irrelevant. The solution is to implement policy that forces smaller deficits in good times without Congressional action. An easy solution is to broaden automatic stabilizers. The less easy solution (but with a bigger effect) is to use crises to enact significant reforms to inefficient/ineffective programs making large contributions to deficit growth. This has been done before by politicians, but this crisis was squandered by everyone in favor of cheap theatrics. I don't think it's in principle impossible, though.



You've turned this into yet another debate about stimulus, but that's not really what I was objecting to. I am objecting to needlessly harsh austerity, which just hurts everyone in the long run. I assume you support austerity now for large developed economies (say, the US, Japan, Germany, France, UK), and I don't understand why.

[Steely Glint]

I have consistently called for medium term deficit/debt reduction including budgetary measures passed now to deal with that future.

I just don't think modern democratic governments are really capable of making even medium term plans. A new minister doesn't feel particularly beholden to follow the plans of the predecessor from the same party, let alone of the previous administration. Indeed, a new minister is usually expected to Do Something when taking office, not often you find a guy given a new ministry going "yeah, this all looks pretty good" then putting his feet up. Thus, "We'll deal with this later" in actuality means "We'll deal with this never". The Coalition will almost certainly lose the next election (despite the best efforts of Ed Milliband) and Labour simply will not deal with the deficit in any meaningful way. So I think it's now or never for austerity, even if there is a case to be made for a carefully laid out plans to cut the debt over the medium term balanced with shorter term growth that cannot actually be a realistic option since the plans will never be followed.

[wiggin]

I just don't think modern democratic governments are really capable of making even medium term plans. A new minister doesn't feel particularly beholden to follow the plans of the predecessor from the same party, let alone of the previous administration. Indeed, a new minister is usually expected to Do Something when taking office, not often you find a guy given a new ministry going "yeah, this all looks pretty good" then putting his feet up. Thus, "We'll deal with this later" in actuality means "We'll deal with this never". The Coalition will almost certainly lose the next election (despite the best efforts of Ed Milliband) and Labour simply will not deal with the deficit in any meaningful way. So I think it's now or never for austerity, even if there is a case to be made for a carefully laid out plans to cut the debt over the medium term balanced with shorter term growth that cannot actually be a realistic option since the plans will never be followed.

It's much easier for them to leave in sensible reforms to major budget items, though. For example, phasing in higher retirement ages over time, or reducing Medicare payments, or moving Medicaid to a block grant program, or changing part D funding, or phasing in increased to Tricare premiums (for military healthcare). These are all necessary changes that don't have immediate contractionary effects on the economy but don't require some remarkable resolve by a future administration to leave in place. Major entitlement reform doesn't happen every administration.

[Enoch the Red]

I claimed increases in spending should be temporary. I have consistently called for medium term deficit/debt reduction including budgetary measures passed now to deal with that future. I have also critiqued both Republican and Democratic budget proposals for ignoring the real issues in favor of pet ideas and band-aids.

That being said, the reality of the situation is that we are not out of the woods; we aren't in 'medium term' territory yet, and crushing austerity now would serve no one. Furthermore, budgets have shrunk or been flat for 3 years - I'd say that qualifies as reversing some of the spending increases. As I've already said about three times, we're already below the pre-recession trend in spending; even if that trend was unsustainable, it wasn't an immediate end-of-the-economy concern but a much longer term issue. That's not even taking into account broader measures of gov't spending - given the states rapidly slashing spending, overall gov't spending hasn't increased nearly as much as pre-crisis trend.

This all seems sensible enough until you realize that the federal budget has more than doubled in the last sixteen years, with over 20% of that increase happening since '08, and the national debt is on track to double from its '07 levels in the next several years.

What is the medium term, and when does one get to object to countercyclical spending that never seems to cycle?

[wiggin]

This all seems sensible enough until you realize that the federal budget has more than doubled in the last sixteen years,

That's less than 5% spending growth each year. Unsustainable in the long term, yes, but only a couple percent above trend GDP growth. It's an issue, but not a burning MUST BE ADDRESSED BY AUSTERITY TODAY issue. It's a chronic problem, not an acute one.

with over 20% of that increase happening since '08,

Er... isn't that roughly what you'd expect? 20% of an increase happening in 25% of the time?

and the national debt is on track to double from its '07 levels in the next several years.

Kinda cherry picked data there, given that you include the worst recession in 80 years for your calculations. But yes, I agree debt is a concern. It's not a particularly overwhelming concern yet - running at about 70% of GDP at the moment - but I fully agree growth in our debt needs to be halted and soon. We have plenty of play left, though, without the need for austerity.

What is the medium term, and when does one get to object to countercyclical spending that never seems to cycle?

Medium term is into the next business cycle.

I think it's perfectly reasonable to object to countercyclical spending if it doesn't 'cycle' as you say. But most built-in stabilizers cycle naturally without Congress' intervention (e.g. welfare, unemployment, etc.), and most extraordinary stimulus spending naturally tapers off in a few years (little of ARRA spending remains; hence the zero or negative spending growth in recent years). It would be better to actively raise revenue or pare spending further during upswings as well, and that is certainly challenging for Congress, but there certainly is some countercyclical element to spending even in our current flawed system.

[Enoch the Red]

That's less than 5% spending growth each year. Unsustainable in the long term, yes, but only a couple percent above trend GDP growth. It's an issue, but not a burning MUST BE ADDRESSED BY AUSTERITY TODAY issue. It's a chronic problem, not an acute one.

When do you think we will address this issue? Right now, when it might be hard both politically and financially, but it still is possible, or years from now when it becomes an acute, MUST BE ADDRESSED BY AUSTERITY TODAY problem? Better question, which is preferable? The federal budget is beginning to resemble an exponential curve, policy makers haven't made a habit of making cuts, (especially substantial ones) when necessary.

Er... isn't that roughly what you'd expect? 20% of an increase happening in 25% of the time?

Poorly worded, mea culpa. The budget may only have increased 20% in that time, but the deficit did as well, jumping more than 310% from '08 to '09, and maintaining a deficit well over a trillion dollars, (reaching over one and a half trillion in 2011) every year after that. A continuing deficit of over a trillion dollars a year is nothing to sneeze at.

Kinda cherry picked data there, given that you include the worst recession in 80 years for your calculations. But yes, I agree debt is a concern. It's not a particularly overwhelming concern yet - running at about 70% of GDP at the moment - but I fully agree growth in our debt needs to be halted and soon. We have plenty of play left, though, without the need for austerity.

Not sure what numbers you are looking at, but the national debt is well over 15.7 trillion dollars, and our GDP is something like 15.1 trillion. I'm admittedly not a math guy, but that seems to be a bit over 70%. I'm guessing you're looking at the net public debt, as opposed to the gross public debt, but I've long believed that to be a mistake. Intragovernmental debt is still backed by the full faith and credit of the US government.

What is your alternative to austerity if you agree that the growth of the debt needs to be halted soon? Substantial increases in taxes? Or do we simply wait for the next cycle to continue not doing anything about the federal budget?

[wiggin]

When do you think we will address this issue? Right now, when it might be hard both politically and financially, but it still is possible, or years from now when it becomes an acute, MUST BE ADDRESSED BY AUSTERITY TODAY problem? Better question, which is preferable? The federal budget is beginning to resemble an exponential curve, policy makers haven't made a habit of making cuts, (especially substantial ones) when necessary.

It needs to be addressed by policy reform today, not austerity. Austerity (by which I mean wholesale cuts in services and increases in taxes) simply isn't necessary. We can tolerate the current deficit and debt and allow more effective solutions to take effect, even if they take longer to phase in.

Poorly worded, mea culpa. The budget may only have increased 20% in that time, but the deficit did as well, jumping more than 310% from '08 to '09, and maintaining a deficit well over a trillion dollars, (reaching over one and a half trillion in 2011) every year after that. A continuing deficit of over a trillion dollars a year is nothing to sneeze at.

The deficit did jump quite a bit in 08 and 09, no question. But I've already covered how most of that increase (over trend) is no longer due to increased spending (over spending trends) but due to inadequate growth/employment/revenue.

Also, a trillion dollars is only relevant in context.

Not sure what numbers you are looking at, but the national debt is well over 15.7 trillion dollars, and our GDP is something like 15.1 trillion. I'm admittedly not a math guy, but that seems to be a bit over 70%. I'm guessing you're looking at the net public debt, as opposed to the gross public debt, but I've long believed that to be a mistake. Especially with more and more baby boomers retiring and drawing Social Security.

Please. Are you serious? The headline number for the national debt includes a number not included in nearly any other country on the planet. The commonly quoted number for gross debt includes so-called intragovernmental debt. It's money the US government owes itself, and comes to about $5 trillion right now. Most of it is held by the Social Security Trust Fund. Essentially we're sitting on a $5 trillion sovereign wealth fund and calling it debt. Most other countries don't figure future pension payments as debt, but the US effectively does.

Debt held by the public - the actually relevant number for our debt figures - runs about 70% of GDP right now.

*This is not to suggest that future liabilities is not a concern, and something the US should be thinking about. It's important to make sure Medicare and Social Security remain solvent without having to dip into general revenue. But people quote debt figures as a percentage of GDP to get an idea of the solvency of a country. Anything above 80% starts to look dangerous for a large developed economy. The US - even after all of its shenanigans and the worst recession in nearly a century - still falls below that for the part of the debt that matters for this rubric, namely debt sold to the market (i.e. 'held by the public').

What is your alternative to austerity if you agree that the growth of the debt needs to be halted soon? Substantial increases in taxes? Or do we wait for the next cycle to

Uhm, I've already explained it. But I'll give a brief sketch:

1. Raise retirement age for social security benefits to 70, increasing at a modestly faster clip than the currently expected increase to 67. By 50 years from now when it actually fully phases in, I don't think it will be a particular hardship to 69-year old workers.
2. Overhaul Medicaid, notably switching to a block-grant system and focusing on providing preventative and primary care and avoiding lots of the current snafus with emergent care.
3. Overhaul Medicare in the context of comprehensive health reform. This would include but not be limited to: increasing Medicare's bargaining rights with both drug/device companies and doctors, changing incentive structures from fee-for-service to capitation/bundled care/integrated care, adding some level of means-testing on premiums, etc. In the meantime, overhaul healthcare for everyone else by pushing cost-sharing with patients, increased competition in the medical sector (notably liberalizing the profession and allowing non-doctors to perform more procedures), changing the insurance system, tort reform, blah blah blah. This will also help Medicaid costs.
4. Look carefully at defense spending to find major areas of spending growth and crush them. Notably, increase Tricare premiums and keep military salaries from increasing at a far higher rate than overall wages or the economy. These personnel costs will drastically decrease the long term budgetary strain on the Pentagon. At the same time, axe unnecessary procurement programs and deployments so long as they do not impair readiness.
5. For regulations in general, implement stronger monitoring systems to fully address the costs and benefits of proposed regulation.

I have other policy recommendations, but they'd largely be revenue neutral (e.g. tax reform) so I won't detail them here. The point is that our major drivers of deficit growth are the above issues (notably 1-4), and they can all be addressed without crushing discretionary spending and letting entitlements and defense squeeze out everything else. These will - in the long term - save a lot of money and greatly decrease both deficits and debt, but won't cause a huge immediate contraction as consumption/etc. drops off a cliff. They actually deal with the problems rather than the symptoms. Symptomatic treatment can be temporarily effective if you're at death's door (like, say, Greece), but if you actually want a cure, you should fix the root cause of the problem.

[Enoch the Red]

The deficit did jump quite a bit in 08 and 09, no question. But I've already covered how most of that increase (over trend) is no longer due to increased spending (over spending trends) but due to inadequate growth/employment/revenue.

Please. Are you serious? The headline number for the national debt includes a number not included in nearly any other country on the planet. The commonly quoted number for gross debt includes so-called intragovernmental debt. It's money the US government owes itself, and comes to about $5 trillion right now. Most of it is held by the Social Security Trust Fund. Essentially we're sitting on a $5 trillion sovereign wealth fund and calling it debt. Most other countries don't figure future pension payments as debt, but the US effectively does.

Our gross debt can have very real impacts on current economics. For instance, there is no trust fund to speak of any more. There are IOU's, but the money has already been spent. And when you factor in the unfortunate reality that SS revenues have already peaked, meaning that Social Security is no longer in the black, it is in the red, you face a very unpleasant turn. That is to say, one of the governments favorite, and easiest sources of 'revenue' has also dried up. Which logically means higher deficits, higher taxes, or both. And ultimately, that money is still on the ledgers and will have to be paid back. With interest.

Uhm, I've already explained it. But I'll give a brief sketch:

1. Raise retirement age for social security benefits to 70, increasing at a modestly faster clip than the currently expected increase to 67. By 50 years from now when it actually fully phases in, I don't think it will be a particular hardship to 69-year old workers.
2. Overhaul Medicaid, notably switching to a block-grant system and focusing on providing preventative and primary care and avoiding lots of the current snafus with emergent care.
3. Overhaul Medicare in the context of comprehensive health reform. This would include but not be limited to: increasing Medicare's bargaining rights with both drug/device companies and doctors, changing incentive structures from fee-for-service to capitation/bundled care/integrated care, adding some level of means-testing on premiums, etc. In the meantime, overhaul healthcare for everyone else by pushing cost-sharing with patients, increased competition in the medical sector (notably liberalizing the profession and allowing non-doctors to perform more procedures), changing the insurance system, tort reform, blah blah blah. This will also help Medicaid costs.
4. Look carefully at defense spending to find major areas of spending growth and crush them. Notably, increase Tricare premiums and keep military salaries from increasing at a far higher rate than overall wages or the economy. These personnel costs will drastically decrease the long term budgetary strain on the Pentagon. At the same time, axe unnecessary procurement programs and deployments so long as they do not impair readiness.
5. For regulations in general, implement stronger monitoring systems to fully address the costs and benefits of proposed regulation.

I have other policy recommendations, but they'd largely be revenue neutral (e.g. tax reform) so I won't detail them here. The point is that our major drivers of deficit growth are the above issues (notably 1-4), and they can all be addressed without crushing discretionary spending and letting entitlements and defense squeeze out everything else. These will - in the long term - save a lot of money and greatly decrease both deficits and debt, but won't cause a huge immediate contraction as consumption/etc. drops off a cliff. They actually deal with the problems rather than the symptoms. Symptomatic treatment can be temporarily effective if you're at death's door (like, say, Greece), but if you actually want a cure, you should fix the root cause of the problem.

Ah, my apologies, I must have skipped over your reply to Steely.

Now, realistically, what are the likelihood of any or all of those policy changes actually occurring? One in five? One in ten? How many congressional leaders are going to stand up and give a speech before Congress saying that military personnel with traumatic brain injuries incurred in the deserts of Iraq or the mountains of Afghanistan are now going to have to pay substantially more out of pocket for their rehab? Wait, that's already happened, except as we can imagine, Congress decided to take the path of least resistance. In what is an increasingly rare bipartisan move, members of Congress have been pushing for more coverage for expensive rehabilitation.

Likewise, it's easy to imagine the AARP putting up a substantial fight to any type of Social Security reform, especially when it comes to cutting benefits. Of course, graduating the age that seniors can draw their SS is likely to be the most palatable and politically actionable change, but it's a change that would still require a good deal of political capital that I'm not guessing either political party or individual member of congress is eager to spend. The same I think can be said for Medicare and Medicaid. In a normal political environment healthcare is a third rail for Washington, let alone when you're talking about major reforms following the ACA. Especially when you consider the backlash the Democratic party faced in the House by seniors after they changed Medicare in the ACA. I'm not guessing many are ready to gear up and wade back into the fray any time soon.

It's just as easy for me to say I can eliminate the budget deficit overnight by cutting spending across the board, but political realities make those policy reforms little more than hopefuly, yet still empty musings.

[Steely Glint]

It's much easier for them to leave in sensible reforms to major budget items, though. For example, phasing in higher retirement ages over time, or reducing Medicare payments, or moving Medicaid to a block grant program, or changing part D funding, or phasing in increased to Tricare premiums (for military healthcare). These are all necessary changes that don't have immediate contractionary effects on the economy but don't require some remarkable resolve by a future administration to leave in place. Major entitlement reform doesn't happen every administration.

Until the next time the government has had a bad week, and feels the need to announce something popular and, oh look, there's all these nasty, nasty policies left over from the last government and it seems that Minister So and So is pleased to announce that money has been found to scrap the planned reduction in Medicare Payments, introduced under the previous administration (what cunts, hey?), thus ensuring the delivery of sunshine and puppies to over 35 billion hard-working families. The nation what? The national whatwhoist? Oh, the national debt. Well, it's only a little bit of debt and the other plans are still intact so it'll be fine and if it's not I'll be long gone from office by the time the shit hits the fan.

Six month later, the press is running a story that new policy by the Ministry of Unintended Consequences will result in up to 750 billion extra cases of baby seal bludgeoning by 2050. Wow, now we look like total shits. Hey, what's this? Looks like those fucks, the previous administration, had these plans to increase Tricare premiums. Are they against veterans or something? Don't they support the troops? The Minister is pleased to announce that... etc etc

[wiggin]

Our gross debt can have very real impacts on current economics. For instance, there is no trust fund to speak of any more. There are IOU's, but the money has already been spent. And when you factor in the unfortunate reality that SS revenues have already peaked, meaning that Social Security is no longer in the black, it is in the red, you face a very unpleasant turn. That is to say, one of the governments favorite, and easiest sources of 'revenue' has also dried up. Which logically means higher deficits, higher taxes, or both. And ultimately, that money is still on the ledgers and will have to be paid back. With interest.

I'm not sure how there's no trust fund to speak of any more - it's currently about $5 trillion. I do recognize that as the SS taxes start to be inadequate to fully fund the program, that trust fund will slowly be reduced and we will fund the deficit from general revenue. This is obviously a long term problem, but it does not represent $5 trillion of current debt. It represents a policy projection, and should be treated as such. It's paper money, and the government can easily change the future costs of SS (which will cut into general revenue) by fairly small tweaks to the program. It does not represent debt we need to raise from the markets.

Now, realistically, what are the likelihood of any or all of those policy changes actually occurring? One in five? One in ten? How many congressional leaders are going to stand up and give a speech before Congress saying that military personnel with traumatic brain injuries incurred in the deserts of Iraq or the mountains of Afghanistan are now going to have to pay substantially more out of pocket for their rehab? Wait, that's already happened, except as we can imagine, Congress decided to take the path of least resistance. In what is an increasingly rare bipartisan move, members of Congress have been pushing for more coverage for expensive rehabilitation.

Likewise, it's easy to imagine the AARP putting up a substantial fight to any type of Social Security reform, especially when it comes to cutting benefits. Of course, graduating the age that seniors can draw their SS is likely to be the most palatable and politically actionable change, but it's a change that would still require a good deal of political capital that I'm not guessing either political party or individual member of congress is eager to spend. The same I think can be said for Medicare and Medicaid. In a normal political environment healthcare is a third rail for Washington, let alone when you're talking about major reforms following the ACA. Especially when you consider the backlash the Democratic party faced in the House by seniors after they changed Medicare in the ACA. I'm not guessing many are ready to gear up and wade back into the fray any time soon.

Some of these policies are more likely to occur than others. SS reform is the easiest one and least likely to have serious detractors - pretty much no one cared when retirement age was raised to 67 a while back (in sharp contrast to places like France), and a slow increase to 70 is not likely to get much blowback, AARP included. Healthcare reform is a disaster, but there is continuing pressure to deal with rising Medicare/Medicaid bills, so they have to do something, whether or not it's my suggested reforms. I'm very frustrated with Obama for squandering a perfect crisis to make mostly cosmetic changes to healthcare, nearly ignoring cost issues while make an (admittedly admirable) attempt to fix access issues. I think it will require a new crisis to spur change in the future, but I don't think it is impossible - just requires a good crisis. Medicaid reform is much easier to carry out, though obviously the savings are lower as well.

I agree that the changes to military compensation are pretty crazy from a political perspective, but realize this: the PENTAGON in their annual budget requests, has been begging Congress to slowly increase Tricare premiums, and has not asked for outsized raises for its troops. This is because they have a limited amount of money to work with, and their ballooning personnel costs are edging out spending on kit and operations. For years now Congress has overridden their wishes, but I definitely can see support growing to acceding to the Pentagon's request in the constrained budgetary environment we're now facing. This can be politically feasible, notably by saying 'hey, this is what our military leadership requested'.

Until the next time the government has had a bad week, and feels the need to announce something popular and, oh look, there's all these nasty, nasty policies left over from the last government and it seems that Minister So and So is pleased to announce that money has been found to scrap the planned reduction in Medicare Payments, introduced under the previous administration (what cunts, hey?), thus ensuring the delivery of sunshine and puppies to over 35 billion hard-working families. The nation what? The national whatwhoist? Oh, the national debt. Well, it's only a little bit of debt and the other plans are still intact so it'll be fine and if it's not I'll be long gone from office by the time the shit hits the fan.

Six month later, the press is running a story that new policy by the Ministry of Unintended Consequences will result in up to 750 billion extra cases of baby seal bludgeoning by 2050. Wow, now we look like total shits. Hey, what's this? Looks like those fucks, the previous administration, had these plans to increase Tricare premiums. Are they against veterans or something? Don't they support the troops? The Minister is pleased to announce that... etc etc

Steely, the way to do this is not to enact a single law that can be easily overturned, but to do it in the context of an overarching reform. By far the biggest concern is Medicare, and much as there were flaws in the PPACA (Obamacare), they did get one thing right - make the law part of one whole, and you can include all sorts of controversial things (e.g. the IPAB) and make it tough to remove one element without getting rid of the whole law.

Also, people get used to a new status quo. I think this may be peculiar to the US' system (as opposed to parliamentary systems), but it's quite challenging to overturn a major reform bill put in place by a previous administration. You can do tinkering on the edges, but it's quite challenging to get the political support to pass another set of reforms so quickly after a previous one. To my knowledge (caveat; I have not looked this up) major reforms to SS and Medicare, once passed, have generally been left alone even if their political opponents have bellyached for years about it. Obamacare is an exception, but there the challenge is not legislative.

[Enoch the Red]

I'm not sure how there's no trust fund to speak of any more - it's currently about $5 trillion. I do recognize that as the SS taxes start to be inadequate to fully fund the program, that trust fund will slowly be reduced and we will fund the deficit from general revenue. This is obviously a long term problem, but it does not represent $5 trillion of current debt. It represents a policy projection, and should be treated as such. It's paper money, and the government can easily change the future costs of SS (which will cut into general revenue) by fairly small tweaks to the program. It does not represent debt we need to raise from the markets.

I am admittedly no expert on Social Security, but it has long been my understanding, (quite possibly my flawed understanding) that any surplus from SS Payroll taxes (as in money that is not immediately payed out to current retirees) goes into the Social Security trust fund, and that revenue is immediately swapped with what amounts to a treasury security. That money is then free to be used in the budget, (read: spent) with a wink and a nod that the treasury security is as good as cash. This is all well and good when the good times are rolling and the SSA is running in the black, and your labor pool is large enough to cover those drawing their Social Security benefits. But Social Security is no longer running a surplus, which means those treasury securities need to be cashed in in order to keep those checks coming. Which means one of three things. The first is that the government can 'shift' funds around and 'find' the money to fund the difference. This essentially means cutting spending elsewhere, so this is an unlikely solution. The second is that the government brings in more revenue, that is to say it raises taxes, which also seems unlikely. Third, and what we all know to be the go to solution, the government will borrow the difference, which means an increase in the deficit and our debt. That's the reason why the President was warning about the impact on seniors for not raising the debt ceiling. That money isn't coming out of a real slush fund or the proverbial lock box, it's coming out of the current, already deficit laden budget of the federal government.

I think it's likely that I'm missing the gist of what you are actually saying, because none of this is new or shocking information, and you are certainly better informed than I. I'd hate to keep talking past you because I'm not getting to the meat of what you are saying, so feel free to correct me, or my interpretation of your position, if I am way off base here.