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Austerity doesn't shrink the deficit in a balance sheet recession…

edited April 2011 in Off-Topic
http://pragcap.com/austerity-doesnt-shrink-the-debt-in-a-balance-sheet-recession

The only way to grow out of this type of recession is to grow economy.

Comments

  • "When the government stopped spending they cut off one of the few private sector revenue sources that remained healthy. This further reduced aggregate demand and is now resulting in even lower tax revenues." This sounds a lot like a mirror image of the infamous Laffler curve.

    Laffler:
    Lower government revenue; economy improves; government revenue increases.
    Raise government revenue; economy deteriorates; government revenue decreases.

    Cullen Roche / Keynes:
    Lower government spending; economy deteriorates; government revenue decreases.
    Raise government spending; economy improves; government revenue increases

    Surely ALL of these propositions cannot be simultaneously correct! Who do you believe has the correct answer (assuming that there is a correct answer).?
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  • edited April 2011
    Please excuse these observations/perceptions in an area outside my expertise. I think it is better to look at what really happens than to fight over what economic theories say should happen. Laffer - I don't see the curve as saying what you describe since no one knows what a good level of taxation/spending is. Keynes - I don't see it here either since different starting points require different strategies. But no matter. Lately I have come to like the term "crowding out" because I think it makes things obvious. If taxes "crowd out" investment then why do low taxes seem to create a lot of speculation? Doesn't that say that there is money to play with instead of to invest with from the perspective of the health of the US economy? Also, as everyone else is asking, where is the large job growth that low taxes should have produced.

    It seems to me that if we need jobs then the resources to produce those jobs should flow to the ability to create those jobs. All answers as to who this should be are just wasteful. Who is not creating jobs is a data point. Maybe, just maybe if people start looking at real effects instead of promised effects we could arrive at a better balance, assuming that either way of thinking has anything to do with anything.

    In short, why buy into anything that boils the complex down to simple statements? For example some industries wouldn't have many jobs if the government did not contract for the work. Other industries don't produce many jobs, maybe they are under-taxed with respect to their utility to the US. I am making this up as I go but jumping from one extreme to the other is not my way of controlling a process.
  • Yep! Exactly right on. By reducing all of this to the simplistic minimum it pretty well shows how unproductive the political slogans are, on both sides. Very few complex mechanisms respond well to chanting of magic slogans.

    Regards-
  • The user and all related content has been deleted.
  • edited April 2011
    Pretty darned good, Maurice. And having spent a bit of time in Greece, I am tending to agree with a lot of your comments. Another thing about Greece, though, is that it seemed to me to be really, really tired. Almost as if there just isn't all that much ambition or drive, or maybe that they are just plain worn down from all of the wear, tear and friction of the centuries. Just coasting. Didn't get that feeling at all from Spain, Portugal, France, Italy or Turkey, by way of contrast. Really old, sure, but by no means "worn out". At least we are not in that shape yet!
  • How do you present austerity to a country that has been used to a high level of excess and choice for many years? Not easily, and it won't be politically popular in the slightest. Hence, I'm not expecting it.
  • Hey Mo. You did great.

    I agree Small Business is the key...

    However, until small business picks up austerity can further cause life for small business more difficult.

    See government spending also supports a lot of small businesses. A lot of small businesses does various services for the government. There are people working in them and these small businesses in turn use services from other businesses.

    If the government shrinks spending, the small businesses that deal with government will be cutting staff and spending and some may even close shop, which in turn remove goods and services from other small businesses. Austerity in this situation does not help. The only way is to wait until the recovery gradually takes root over time and reduce government support as the patient (economy) recovers. As economy recovers so does tax collection and balance sheet improves.
  • The article made me think of how important government spending is at this point in time...what a sorry thought.

    Entitlements (sorry thought II) help the economy tread water as spending of those entitlements probably net a zero for the economy. Government spending for the defense industry (in the form of nation building) has attempted to "spend" our way out of this recession with far less nobler causes than World War II.

    Aside from all the horrific bloodshed (which many can't ignore) Iraq's economy post war is thankfully a success story that doesn't get much headline coverage these days. Afghanistan's mineral reserves will ultimately propel that country into prosperity so long as the rule of law can be fostered and adhered to.

    I can only image a world where all of this bloodshed and financial terrorism could have been avoided. The consequences of poor judgement by individual as well as by nations of people comes at a price.

    Ultimately we all pay for these rip offs unless they not nipped in the bud. The one thing worse than rule of law is fake rule of law.
  • Howdy folks,

    Austerity is probably what we're looking at and it could last 10-15 years. What scares me more is the distribution of wealth and the genocide of the middle class. The middle class is being extermimated and we will be lucky if we can keep our kids and grandkids in this strata.

    Supply side economics is bs. Sure you need to address the supply side but to ignore the demand side is what Junior did with his tax cuts. Lots of good stuff in his cuts but not enough for the lower rungs on the ladder. I said it at the time. CapEx taxes were cut, interest rates around zero and lots of money available to invest in new P&E leading to jobs. Pure supply side mantra. OOPs. If I have a plant operating at 75% of capacity, I don't care how cheap and available financing is, I'm not building a new play, adding another shift, or hiring more workers. Period.

    The lower rungs of the income ladder have a marginal propensity to consume around 100% while the rich have one that's much lower. The rich went out a bought a mercedes but we need the joe sixpacks buying 10 chevy's. Notice how high end retail has never blinked but overall consumer discretionary is still in the gutter.

    Can the gov't spend their way out? I don't think so but they're trying. Uncle Ben is dropping dollars from helicopters and has been.

    just some mumblings,

    peace,

    rono



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