Marshall Auerback: "Troubles in the EuroZone: Will the Contagion affect the U.S.?"
Roosevelt Institute Senior Fellow Marshall Auerback and Braintruster at the New Deal 2.0 explores the possibility, and what it means if deficit hysteria continues unchecked:
A recent poll by Douglas Schoen and Patrick Caddell suggests that swing voters in the US, who are key to the fate of the Democratic Party, care most about three things: reigniting the economy, reducing the deficit and creating jobs.
But the latter two goals are generally incompatible, especially during major recessions.
In times of high unemployment, government deficits are required to underwrite growth, given that the private sector shift to non-government surpluses has left a huge spending gap and firms responded to the failing sales by cutting back production. Employment falls and unemployment rises. Then investment growth declines because the pessimism spreads. Before too long you have a recession. Without any discretionary change in fiscal policy (now referred to in the public media as “stimulus packages”) the government balance will head towards and typically into deficit, unless the US miraculously becomes an export powerhouse along emerging Asia lines, and runs persistent current account surpluses, to a degree which allows the governments to run budget surpluses.
This is not going to happen, particularly when the largest current account surplus nations, notably Germany, cling to a mercantilist export led growth model, an inevitable consequence of that country’s aversion to increased government deficit spending. The German government’s reticence to counter any kind of shift in regard to its current account surplus is particularly significant in light of the ongoing and intensifying strains developing in the EMU nations (see here) . Last week’s Greek “rescue” is Europe’s “Bear Stearns event”. The Lehman moment has yet to come. One possible outcome of this could well be significantly larger budget deficits in the US and a substantial increase in America’s external deficit, given the unlikelihood of America becoming an export super power again. Let me elaborate below.
In the euro zone, I now see one of two possible outcomes. Scenario 1: the problem of Greece is not contained, and the contagion effect extends to the other “PIIGS” countries, leading to a cascade of defaults and corresponding devaluations as countries exit the EMU. Interestingly enough, the country which could well be affected most adversely in this situation is France, as the country’s industrial base competes largely against countries like Italy and the corresponding competitive devaluation of the Italian currency in the event of a euro zone break-up could well destroy the French economy (by contrast, as a capital goods exporter with few euro zone competitors, Germany’s industrial base will be less adversely affected in our view).
In Scenario 2 (more likely in my opinion) we get some greater fears about other PIIGS nations (discussion is now turning to Spain, Portugal and Ireland). The EMU might well hold together but the corresponding fear of contagion might well provoke capital flight and drive the euro down to parity (or lower) with the dollar. Of course, the euro’s weakness creates other problems: when the euro was strengthening last year due to portfolio shifts out of the dollar, many of those buyers of euro bought euro denominated national government paper (including Greece). The resultant portfolio shifts helped fund the national EMU governments at lower rates during that period. That portfolio shifting has largely come to an end, making national government funding within the euro zone more problematic, as the Greek situation now illustrates.
The weakening euro and rising oil prices raises the risk of ‘inflation’ flooding in through the import and export channels. With a weak economy and national government credit worthiness particularly sensitive to rising interest rates, the European Central Bank (ECB) may find itself in a bind, as it will tend to favor rate hikes as prices firm, yet recognize rate hikes could cause a financial collapse. And should a government like Greece be allowed to default, the next realization could be that Greek depositors will take losses, and, therefore, the entire euro deposit insurance lose credibility, causing depositors to take their funds elsewhere.
It all could get very ugly for the ECB. The only scenario that theoretically helps the value of the euro is a national government default, which does eliminate the euro denominated financial assets of that nation, but of course can trigger a euro wide deflationary debt collapse. The ’support’ scenarios all weaken the euro as they support the expansion of euro denominated financial assets, to the point of triggering the inflationary ‘race to the bottom’ of accelerating debt expansion.
So timing is very problematic. A rapid decline of the euro would facilitate a competitive advantage in the euro zone’s external sector, but it could also set alarm bells off at the ECB if such a rapid devaluation creates perceived incipient inflationary strains within the euro zone.
What about the US? In the latter scenario, we can envisage a situation in which the combination of panic and corresponding flight to safety to the dollar and US Treasuries, concomitant with the increased accumulation of US financial assets (which arises as the inevitable accounting correlative of increased Euro zone exports) means that America’s external deficits inexorably increase. There will almost certainly be increased protectionist strains, a possible backlash against both Europe and Asia, especially if the deficit hawks begin sounding the alarm on the inexorable rise of the US government deficit (which will almost certainly rise in the scenario we have sketched out).
Assuming that the US does not wish to sustain further job losses, the budget deficit will inevitably deteriorate further, either “virtuously” (via proactive government spending which promotes a full employment policy), or in a bad way , whereby a contracting economy and rising unemployment, produce larger deficits via the automatic stabilisers moving to shore up demand as the economy falters.
How big can these deficits go? Easily to around 10-12% of GDP or higher (versus the current 8% of GDP) should a euro devaluation be of a sufficient magnitude to induce a sharp deterioration of America’s trade deficit. Possibly even higher.
What will be the response of the Obama Administration? America can sustain economic growth with a private domestic surplus and government surplus if the external surplus is large enough. So a growth strategy can still be consistent with a public surplus. But this becomes virtually impossible if the euro zone’s problems continue, as we suspect that they will.
President Obama, however, has long decried our “out of control” government spending. He clearly gets this nonsense from the manic deficit terrorists who do not understand these accounting relationships that we’ve sketched out. As a result he continues to advocate that the government leads the charge by introducing austerity packages – just when the state of private demand is still stagnant or fragile. By perpetuating these myths, then, the President himself becomes part of the problem. He should be using his position of influence, and his considerable powers of oratory, to change public perceptions and explain why these deficits are not only necessary, but highly desirable in terms of sustaining a full employment economy.
Governments that issue debt in their own currency and do not promise to convert their currency into anything else can always “afford” to run deficits. Indeed, in this context government spending financially helps the private sector by injecting cash flows, providing liquid assets and raising the net worth of some or all private economic agents. In contrast to today’s budget deficit “Chicken Littles”, we maintain that speaking of government budget deficits as far as the eye can see is ludicrous for the simple reason that as the economy recovers, tax revenue rises, the deficit automatically reduces. That’s the whole reason for engaging in deficit spending in the first place. Any projections that show the deficit continuing to climb without limit is misguided — the Pete Peterson projections, for example, will never come to pass. As we near and exceed full employment, inflation will pick-up, which reduces transfer payments and increases tax revenues, automatically pushing the budget toward surpluses.
In the 220 year experience of the United States there have only been a few years when we’ve not had deficits and each time the surpluses were immediately followed by a depression or a recession. History shows that we can run nearly permanent deficits and that when we do, it’s better for the economy. The challenge for our side of the debate is to expose these voluntary constraints for what they are and explain why the US is not a Weimar Germany waiting to happen.
This article was originally published at the New Deal 2.0 and reproduced with author’s permission.
Calculated Risk posted a good piece yesterday on the Greek debt situation. Germany’s Bundesbank President Axel Weber appears to be concerned, saying, “We cannot allow the bankruptcy of a euro member state like Greece to turn into a second Lehman Brothers.”
Germany, merchantilist? Merchantilism, in practice, is typically characterized by policies which limit imports and promote exports. Now, Germany does have such policies, as do all of Germany’s major trading partners, so if we are to sit still for the claim that Germany is merchantilist, do we also have to allow that all of Germany’s main trading partners are, as well? So either the assertion is that we live in a merchantilist global trade system, or the claim of merchantilism becomes trivial.
The alternative is to show that Germany is more merchantilist in its practices than other nations. Germany trades heavily within the EU, and within the EMU, which means shared trade policies, borders very open to trade and, in the later grouping, no FX issues, at all. In that context, how is Germany more merchantilist that France or Portugal? Outside that context, Germany adheres to WTO and IMF rules as well as most. How does that make Germany merchantilist?
Germany has a substantial trade surplus, it’s true. Germany has a large GDP share in both imports and exports. Neither of those necessarily means Germany is more merchantilist than her trading partners. In fact that latter fact is inconsistent with normal patterns of merchantilist behavior.
Absent some supporting evidence, the assertion of merchantilism looks gratuitous, and mistaken. It looks like the term is being used to mean “has a large trade surplus of which I (the writer) disapprove”. Not sure that’s what you’d find in the dictionary.
And, while I’m at it, I think there is another fairly wild mis-statement at the center of this essay. The claims is made that “As a result he (Obama) continues to advocate that the government leads the charge by introducing austerity packages – just when the state of private demand is still stagnant or fragile.”
Now, the syntax makes it hard to be entirely sure of what is being claimed (as does the assertion that Obama is fostering “myths” in the next sentence, without being clear about the “myth” in question – though it is clear that something associated with deficits is meant), but the sentence seems to mean that Obama has introduced “austerity packages”. Name one. Point to a single “austerity package” that Obama has actually offered, supported, dated, friended on facebook. There are none, because there are no “austerity packages” anywhere in sight. Budgets, as proposed, point to deficits of a fairly steady, large size, through the entire period for which budget balances are projected. Obama has appointed a commission to suggest deficit reducing measures. Reducing the deficit is not the same as imposing austerity, and there are no packages yet introduced.
Getting Germany’s trade policy wrong and getting Obama’s actual budget proposals wrong doesn’t look good. Looks like slapping any old label on things that seems likely to sell the story. Personally, I prefer essays which demonstrate a grasp of facts and make objective, truthful use of language. But maybe that’s just me.
I disagree with the proposition that deficits are necessary for growth. I realize that no one will agree with me. But maybe I can start a thought.
This is not 1932. It is not even 1960. There is a huge amount of idle money in private hands. There is no incentive for private hands to spend or invest during a “recession.” The answer is, and has been, government spending and investment. So far so good.
But we also have a very large deficit already. This may affect the “economics” of “stimulus.” In any case it is not obvious that raising taxes on those who have “idle” money would reduce their spending and investment. This would allow the government to spend and invest without increaseing the deficit… which could, given that it is already very high, have unexpected consequences.
I think the “raising taxes kills growth” meme has been overapplied, is dangerous, and needs to be tested. I would certainly expect a 3 tenths of one percent increase in the payroll tax to have no adverse affect whatsoever, and a matching increase in the marginal tax on incomes over 100k would certainly NOT reduce “investment.” And whatever spending it reduced would be more than made up for by the government spending in more targeted areas of the economy. If we can find anyone in government sober enough to even guess in which direction to look for the target.
kharris
i think you get a bit carried away. the deficit commission is all about an austerity package: cutting social security. of course we don’t know that’s what obama will propose, but we are allowed to make reasonable guesses about what is definitely “in sight.” meanwhile, in the context of the essay, it seemed to me that “myth” was pretty clear: the myth of unsustainable deficits.
***But the latter two goals [reducing the deficit and creating jobs] are generally incompatible, especially during major recessions.***
Not really — unless you worship at the church of wingnutism. One way to reduce future deficits is to raise taxes. Although our right wingers take it as an article of faith that tax rates are inversely correlated with GDP, there is virtually no evidence to support that theory. In my book, that’s religion, not science and certainly not pragmatism.
The huge tax cuts enacted under George W Bush apparently produced no significant growth in real per capita GDP (real, per capita gdp growth = 0.7% per year under Bush vs 2.9% under Clinton) and I for one expect that large tax increases focused on the wealthy will have a positive affect on the out year deficit and virtually no affect on growth. [I got my numbers from http://www.measuringworth.org/datasets/usgdp/result.php%5D
I wouldn’t necessarily raise taxes right now today, but a promise of reforming the tax code and incressing income tax progressivity if voters will just vote for Democrats and sane Republicans (good luck on finding those) might be a shrewd political move.
“…introducing austerity packages” is wrong in that there is no introduction, no package and no plural. What we have so far is the standard shift of a hard issue out of the hands of lawmakers into the the hands of the “wise”. Anyone who mistakes that for “introducing austerity packages” has a poor grasp of what is going on, and of how Washington works.
The Auerbach piece has been imported as an example of something or other, but seems mostly to represent sloppy thought. The blogging convention of raising the profile of a blog entry posted somewhere else by linking to it or lifting it in part or entirely and reposting it is, as I understand the practice, meant to suggest approval and perhaps admiration. I have a hard time understanding why we are encourages to approve or or admire writing relies so little on fact and clear thought, so much on mis-statement and unfounded assertion.
Let me agree with kharris on all counts. And further, I’d like to ask exactly what is wrong with mercantilism. Are all countries supposed to run a negative balance in international trade? That’s not possible. If it were, then a policy of promoting domestic debt, massive deficit spending (prefereably off budget), and cutting taxes below expenditures should be every nation’s goal.
If foreign trade is a game, why do we blame the winners rather than trying to improve the skills of the losers? If it’s not a game, where are the protocols that allow everyone to trade in a fair and equitable manner?
I’ve become a little confused over this magical demarcation point of “no new taxes unless you make over $250K”. Since when is $250k the new poverty level?
Other than that, there are more problems with this article, and the authors thinking, than I have the energy to enumerate right now(partly because I’m not an economist, and I can’t find much I like about either “old” or “new”, or “very new” economics). But before I shut up, I’ll state that Greece never had “deficit hysteria”, and then just follow the line of thinking from there.
Oh, just to pile on a bit, what exactly makes export-led growth (leaving aside the gratuitous “merchantilist”) the “inevitable result” of reluctance to expand the deficit? In the grand GDP-accounting scheme of things, a high national savings rate is likely to result in a more positive current account balance, all else equal, I’l grant. In the context offered, though, another perfectly likely outcome is slower growth.
I’d also note that in the most recent episode, the US, a deficit country, experienced a narrowing trade gap as it engaged in massive fiscal expansion. Kinda makes “inevitable” seem a bit silly.
Some writers think in pat phrases. Some feel the urge to slap that extra, not-all-that-helpful modifiers onto their nouns and verbs. They seem to think that makes the writing better. Often, it makes the substance of the statement wrong, when leaving them out could have made the substance right. Modifiers constrain the statement, requiring a narrower set of facts to obtain in order for the statement to be true. Auerbach has written things that are simply not true.
KHarris
“Mercantilism is an economic theory, considered to be a form of economic nationalism,[1] that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is “unchangeable”. Economic assets (or capital) are represented by bullion (gold, silver, and trade value) held by the state, which is best increased through a positive balance of trade with other nations (exports minus imports).
The theory assumes that wealth and monetary assets are identical. Mercantilism suggests that the ruling government should advance these goals by playing a protectionist role in the economy by encouraging exports and discouraging imports, notably through the use of tariffs and subsidies.[2] The theory dominated Western European economic policies from the 16th to the late-18th century.[1]” “
Now, other than the tariffs and subsidies (which Germany may or may not have I do not know but Marshall might) I think this pretty accurately describes Germanys policy towards managing its economy. I do not think Marshall even meant mercantilist in the strictest sense of the word, however a mercantiltist nation would have a current account surplus like Germany maintains. I think you miss Marshalls larger point in your effort to find some fault with his analysis though. If you have followed much of his other posts he mostly is saying that export led growth policies are fine but can only be maintained by some nations. It is not to be a template used by everyone as a model for growth, which seems to be how the Euro nations have set their currency rules up (they favor Germany type behavior). The reason should be obvious but I never hear anyone point out (other than Marshall and a few others) that for every net exporter there needs to be a net importer. Policies which dont consider this or seem to favor one side or the other will necessarily fail. Policy should be neutral on which is desirable because both are equally necessary.
I think Coberly has pointed out where the […]
Codger said: “I wouldn’t necessarily raise taxes right now today, but a promise of reforming the tax code and incressing income tax progressivity…” This thought process strikes me of being of the “One True Religion” type. When 47% do not pay or actually recieve more than they pay in income taxes, you still want more to join that group???? Increased progressivity?
I’m not sure where you are going with this. Are you suggesting that we legislate that income taxes not be collected from those of a certain income and below to protect them from their own ignorance? Are you suggesting that we decrease, even more, the available wage earners paying income tax?
What is it you are proposing?
kharris,
I agree. It should be added though that if measured in terms of the harm done, agricultural subsidies rank the highest among unfair trade practices. It is worth noting though that all of the developed nations subsidize agriculture and, in Norway and Switzerland as much as two-thirds of total farm income comes from subsidies. In Japan it is half, and a third in the EU. Stiglitz puts it thus: “The aggregate agricultural subsidies of the US, EU, and Japan (including hidden subsidies, such as on water) if they do not actually exceed the total income of sub-Saharan Africa, amount to at least 75% of that region’s income, making it almost immpossible for African farmers to compete in world markets.”
It is also worth mentioning that since the creation of the WTO in 1995, as part of what was called the ‘Grand Bargain’, the developed nations have been promising that agricultural subsidies would be phased out. Since that promise was made the subsidizing has increased.
Mark Malloch Brown, former head of the United Nations Development Program, estimated that farm subsidies cost poor countries about USD$50 billion a year in lost agricultural exports:
“It is the extraordinary distortion of global trade, where the West spends $360 billion a year on protecting its agriculture with a network of subsidies and tariffs that costs developing countries about US$50 billion in potential lost agricultural exports. Fifty billion dollars is the equivalent of today’s level of development assistance.”
VT
I think you get Auebach completely wrong. Go read some of his other stuff. He is not denouncing a positive Current Account, he simply points out that it cannot be that way for all countries and way too many people when they analyze a country like Greece simply say “Instead of debt just export more”.
NOT ALL COUNTRIES CAN BE NET EXPORTERS.
Sorry for yelling but that is his over arching point if you read his work. The EU has rules for debt to GDP which were set up mostly by Germany and therefore have a German philosophy to them. It is wrong for rules to favor one particular approach over another when both approaches are equally necessary. Now certainly ALL EU countries could be net exporters as long as there are some net importers out there but the fact remains the German work ethic or economic ethos is not applicable to every country. It will not sustain itself.
VT
Let me add too that your comment about trade being a game is key I think. It is too often viewed as the exporter winning and the importer losing. I think this is just plain silly, why would you want to characterize as losers those people who are buying what you want to sell? Both sides are equal. No one is losing. In fact it could more correctly (I think) be viewed as one side working to produce more than they can consume so they can get bits of paper form the other side.
This point really comes home in our current non gold backed currency world. Used to be Germany sold you cars and got some gold now its just “credits for $US”. So whose winning there??
With “soft” currency the exchange rates adjust so eventually your stuff becomes cheaper and now Germany can use its credits to get your stuff, it can all work out by currency adjustments. Unfortunately peoples behavior rarely adjusts that much and Germany keeps a strong currency and berates all the net importers for their debt positions. Sad and so unnecessary.
I actually agree Coberly but thats because I’m going to stop calling them deficits and simply call them investments.
Would you say investments arent necessary for growth?? I’ll bet you wouldnt.
Now we can change the conversation to should the govt invest or should private entities invest?
Thats a little easier to answer because most would say both but the ratio might be different with different folks.
My position is that we have been waiting and hoping for private sources to invest more for 2+ yrs.
Its not happening and its not because they are “crowded out” or because they are over taxed. They are not investing because Says Law isnt true. Why go build something if you dont have a reasonable idea it will be bought? In fact this has been a great time to test Says Law and it has categorically failed. Where is all the demand to meet that supply?
One entity can invest and not only not worry about return but can in fact just create instant demand (income) for someone.
The crux of Marshalls analysis (and that of Randall Wray, Rob Parenteau, Rebecca Wilder, Bill Mitchell, Warren Mosler, James Galbraith, Scott Fullwiler and others) is the sectoral balances equations which unlike Says Law cannot be violated.
You have three sectors Govt, Domestic private and Foreign private. Some folks put Domestic and Foriegn into one but the better way is to separate them.
The amount of deficit /surplus among all the sectors will net to zero. If the Govt is in deficit by a trillion the other two will be in surplus by a trillion. Now this could be that the private Domestic is in deficit by a trillion too but the private Foreign is in surplus 2 trillion.
The Govt Budget deficit is Govt Spending minus Taxes
Domestic Balance is Investment minus Savings
Foreign Balance is Exports minus Imports
If you do the math you will find that our country being a large net importer and currently saving more than investing needs a huge Govt Spending component or there will be enormous shrinkage of our economy
***Codger said: “I wouldn’t necessarily raise taxes right now today, but a promise of reforming the tax code and incressing income tax progressivity…” This thought process strikes me of being of the “One True Religion” type. When 47% do not pay or actually recieve more than they pay in income taxes, you still want more to join that group???? Increased progressivity? ***
Interesting that you should read increase progressivity as “tax fewer people” when it means “tax the worthless wealthy again” to many — I think most — of us.
love
i wonder if this is the only way of looking at it. ag subsidies allow us to export cheap grain to the world and undercut local farmers creating poverty etc. but it those countries had tariffs to keep out our cheap grain, their local farmers could earn a living… not by exporting their grain, but by eating it.
my understanding is that “poverty” as we have been led to believe… meaning subsistence agriculture may have been a better life than being unemployed in the cities looking for that “relative advantage” that makes free trade such a win win for the economists and their bosses.
harris
if we are to exclude sloppy thinking from this or any other blog, electricity bills across the nation will plummet. but you need to be careful that “sloppy thinking” does not mean “disagrees with me.”
harris,
granted all that, the answer is for you to answer the substance of the argument, not attack “sloppy thinking” in generalities.
greg
agree mostly. but lots of folks would deny that government “invests.” they call it governmetn “waste.”
(i am not one of htose people). but i would argue that even gov needs to worry about return. better to use the money to build something that will help future production. of course keeping your labor supply alive might be considered an “investment.”
CoRev
you are getting overexcited. it would increase progressivity if the top marginal rate was increased 1%.
I personally don’t see a problem with increasing the tax rate of the poor and the poor middle class a little bit. But you have to realize that the poor do not have enough money to pay the bills the country has incurred. that’s all we are proposing. or I am proposing.
***Let me add too that your comment about trade being a game is key I think. It is too often viewed as the exporter winning and the importer losing. I think this is just plain silly, why would you want to characterize as losers those people who are buying what you want to sell?***
No, that’s not silly at all. There are complexities. Importing a machine tool (probably) builds productive capacity and is different than importing 50,000 cases of caviar. But exchanges that actually build future productivity rather than satisfying current consumption needs would seem to be quite rare.
For the most the basic situation is no different than any other buyer, seller relationship. The buyer gets current goods, the seller gets tokens usable in the future. In general, the seller has the option of saving part of the tokens. The buyer (for the most part) has no symmetric option if the goods are perishable. Sure looks to me like the seller can “win” in the sense of eventually ending up awash in obligations that can be imposed on the buyer. The buyer can — at best — break even if the seller decides not to save up obligations.
Greg,
you have engaged in the same sort of sloppy assertions as Auerbach, which is no surprise since the gist of what you’ve writtien is “yeah, what he said”. Now, anybody can clip from Wikipedia, and doing so can sometimes be useful, so let’s take a look. Bullion? Um, no. Bullion as capital? No, again. Tariffs and subsidies? No more than the rest of the EU/EMU, which constitutes the majority of German trading partners, which I pointed out earlier, and which you have not bothered to answer. The point that Auerbach seems to be making is that Germany is refusing to expand its own budget deficit in order to help Greece cover its deficit. He has called that merchantilism. It simply is not merchantilism.
Oh, blah, blah, blah. Kid, you haven’t bothered to make a case here. You’ve engaged in wild question-begging with the “tackle deficit equals austerity” claim. Did Clinton engage in austerity budgeting in order to produce a surplus? If you say yes, they all you’ve done is eliminate any unique definition for “austerity” by claiming it to be identidal to deficit reduction. (This might be a good time for you to check another reference work. “Austerity” does, in fact, have a meaning distinct from deficit reduction.) Same with merchantilism. Merchantilism is not a result, contrary to what you assert and Auerbach seems to imply. It is not a label that can rightly be slapped on any country which happens to run a trade surplus. A trade surplus is not even the sure result of merchantilist policies – trade is a two (or more) way deal and the other guy has something to say about the results. Mechantilism is a view of trade and a related set of government practices. What evidence do you (or Auerbach) present to show that Germany’s government is any more aggressive in promoting exports and limiting imports than France or Morocco? Again, if what this comes down to is that Germany has some trade-distorting rules, well so does everybody else. What’s the point of the Merchantilist label being applied to Germany in particular, if Swedish and Canadian trade practices are just as pro-trade-surplus?
One of the wonders of English is that we have more words, with meanings often specific to themselves, than just about any other language. Austerity does mean something other than reduction of a deficit. Merchantilism does mean something other than a trade surplus. They simply do. Why impoverish the language?
So here’s the thing. If you are satisfied with and allow yourself to be swayed by things that sound sort of like something you could agree with, and you don’t really care whether words are used to mean what they mean in standard, educated speech, then the Queen of Hearts and every politician in the world and Hannity and Limbaugh have some things they’d like you to hear. I prefer to have people say things that are actually true, to have words used to mean what they actually mean, preferably in some non-misleading, non-trivial way.
CoRev,
Putting your own favorite pony of an argument in other people’s mouths is not really a good way to contribute to discussion. Not only did VTC not say anything about ignorance, but you seem to have allowed frequent repetition of “protect them from their own ignorance” in your own speech to lead you into illogical repetition here. It is mere dogma which holds that ignorance is the main cause of some people earning less than others. That point has been made over the generations, and has been made here at this blog long enough, that to pretend as you have that that the ignorance argument still holds water is silly. Make a real argument. Respond to what others have actually said rather than what you imagine some idealized dummy of an opponent would say, and take in what is known about the world. That’s what honest, intelligent people do.
Coberly
Do not disagree at all. As you chided miss Harris above, those that call govt investment waste are probably more guilty of simply saying I dont agree with the efforts of that spending. I think using the term waste can be simply “sloppy answering”.
When you say govt needs to worry about “return” how do you mean? Certainly the govt does not have a place where they put their returns so they can spend them later.? Right?
Again, I’m not trying to be a nit picker here BUT too often we talk about govt like its a household or business and that it needs to save now so it can spend later. That most assuredly is not so ,which IS NOT the same thing as saying it can spend as much as it wants on everything that it wants.
Do we agree on that?
And yes, keeping alive your labor supply is most definitely an investment (no need for you to equivocate with a “might be” there)which should not be emphasized enough so we can get our republican friends to take the other side of that argument.
I think you might be beginning to see where I’m coming from. To one side its ALL about finance and interest rates and ratios of debt to GDP that we need to be focusing on. To the Marshall Auerbachs, Rebecca Wilders, Bill Mitchells etc etc its about the economics. Finance is not economics. Finance is useful til its not. Right now finance is running roughshod over govts who would like to take care of their people. They are becoming predators.
***I disagree with the proposition that deficits are necessary for growth. I realize that no one will agree with me. But maybe I can start a thought.*** Coberley
Isn’t the authority on this Keynes — who seems to be once again in possession of the field as a result of the total disaster that has befallen freshwater economics?
If I recall correctly a cornerstone of Keynesian thinking is that countries should stimulate economic activity in bad times (i.e. run deficits) and run surpluses in good times to pay down the debt run up in the downturn. Worked pretty well until we turned the economy to a bunch of financial arsonists — many of whom are — to my great annoyance — still advising President Obama. President Clinton — who would appear to be something of an expert on being led astray — claims that he was given very bad advice by Robert Rubin and Larry Summers. And yes, that appears to be the selfsame Larry Summers who is director of the White House’s National Economic Council. http://dailycaller.com/2010/04/18/clinton-admits-responsibility-then-blames-advisers-gop-for-financial-mess/
***Greg***
Does anyone take Say’s Law in any form seriously? Why?
You might want to read the Wikipedia entry on Says law — in particuar the section titled “consequences”
— it would appear that Jean Baptiste Say saw things pretty much the way you and Coberley do.
http://en.wikipedia.org/wiki/Say's_law
It appears that JS-Kit has eaten yet another comment.
I actually don’t disagree with Auerbach much. I was merely deploring the widespread tendancy to label countries who run a positive trade balance as “merchantilist” rather than “smart/discipled”. To my mind, the United States in particular has adopted a policy of consume now. pay later. Later is rising in the East and we are trying to blame that on someone other than ourselves. If we’d been a bit more seriously “merchantilist” ourselves maybe we would not have embraced free-lunch economics and ill-found free trade agreements with so much enthusiasm.
coberly,
The answer is for me to do as I see fit. You may, if you like, slavishly absorb whatever suits your personal bias.
In case you’ve missed it along the way, I don’t like arguments based on lies, misdirection, weak logic, slogans, intimidation or grandiose language. My intention is to point out the weakness in such arguments when I see them. In this particular case, I’ve notice that Auerbach has been dragged in here at least twice with favorable mention, and in both cases, he has sold his point by saying things that are simply wrong.
This idea that false claims, false logic and false language are fine, as long as the argument gets where it needs to go – not something I can support. If we don’t show up willing to learn and change our minds if necessary, then all these discussions do is provide an outlet for gas. If we do show up willing to learn, then we can’t really tolerate the notion that the quality of the argument doesn’t matter.
Oh, and, if you bother to pay attention to what I wrote, you’ll not that I attacked sloppy thinking in a number of specifics. To think otherwise is to engage in – you know – sloppy thinking.
CR,
I’m convinced they pulled that number out of a dark spot, but I wouldn’t bet against the notion that $250K is what the ‘progressives’ feel is the amount needed to live comfortably in NYC or SF. Even though it easy to live comfortably on $60K in fly-over country. But that’s not for teh cool-kids…
Islam will change
coberly,
You are beginning to creep into serious dishonesty. The insidious sort of dishonesty that allows deniability.
My issue with Auerbach is not with his ultimate point, as any honest reading of what I’ve written will attest. In fact, you’ll note that I did not address Auerbach’s conclusion. I showed that he was making silly assertions about who can realistically be called merchantilist and what can honestly be said about Obama’s fiscal policy. Where he goes with his poorly argued ideas is not really my concern here. My concern is that he hasn’t justified getting there. Which, if you’d actually paid attention, you’d know. But instead, you simply imply that I’m stooping to your level – argument by insinuation.
And not for the first time. I recall a cheap shot about a year ago from you, in which you decided that insinuating racism on my part was a good way to deal with an argument from me you didn’t like. So, you snivelling little creep, if you have something you want to work out with me, try, for once, to summon the courage to do it directly.
coberly,
I have actually stayed for extended periods with ‘peasants’ in Latin America who were perfectly satisfied with their lives. Most subsistence farmers rely on barter and just how much consideration the World Bank gives to barter is a question I have tried to find an answer to but without much success. As I have said many times before though, poverty is like beauty, as in ‘the eyes of the beholder’. And it’s fairly obvious that it is more than a coincidence for current policies to keep global labor markets in a constant state of oversupply ($1.25 per day is absurdly low, that equates to $0.16 per hour based on a 40 hour work-week).
As for poor nations protecting their ag markets: If a politician in a poor country wants to bring down the full force of the developed world on his political-head, or if he is trying to think of some clever way to lure to the US military and countless covert operatives onto his native soil, campaigning on promises based on protectionism would do just that. I would provide an example but I don’t know of any politicians stupid enough to chose a strategy that guarantees losing, (at best). I was however in El Salvador in the 80s when the other, more preemptive, method was in play. The ‘preemptive’ strategy is to supply ‘aid’ to the local military so as to upset the balance of power in favor of the military, and of course, military juntas are nearly always business ‘friendly’ so long as the ‘aid’ continues to flow.
Thanks for the opportunity to rant ~ Ray
Codger, saying: ““tax the worthless wealthy again” to many — I think most — of us.” That’s what I was afraid you were implying.
Raising taxes on the worthless wealthy can be counter productive. I know we are old enough, but don’t know if you remember the “brain drain” immigrants of the 60s and 70s, where many educated Europeans immigrated to the US? One of the reasons they immagrated was the high tax rates in their home countries. Of course the better job options in the US was also a major factor.
Codger, I fear you have drunken greatly of the class warfare Koolaid. I really did want a more detailed explanation of your proposal. I guess I was hoping you were not going to just voice the liberal class warfare tax mantra.
Dale, KHarris, let me explain my comment re: ignorance. those in the 47% non-income tax brackets, are ignorant if they are giving the US Fed Govt ANY of their wages for possible income taxes. A simple fix to that would be a law relieving them of any contribution, and a simple post card filing to determine eligibility for their EITC payment.
For many working poor that is an immediate raise in their take home pay. But, you see, I do not believe in class warfare commentary. It serves no real world purpose, and only lives in the political world.
Dale, I did not get excited? I was simply querying Codger as to what he was proposing. Seems everyone else has gotten excited about just trying to identify his proposal.
KHarris, you are projecting. Nothing you are claiming was in my thoughts.
Sheesh!!!
I agree with KHarris….calling Germany mercantilist is a bit of a stretch. The logic for doing so is contorted and opaque. All in all, a sloppy article.
kharris
i doubt it was me who insinuated racism. my position has always been that we are all racists. some of us just do a better job of being nice in spite of it.
you seem to be out of sorts today. not much point in arguing with you.
kharris
can’t quite let that one go. anyone who thinks words have an “actual” meaning doesn’t know a damn thing about language or the human mind.
greg
more nor likely i agree with you, except where i don’t. but i think i agree in spirit. all i meant by government getting a return on its investment is that it ought to try to do something useful when it spends money. arguably something that makes it easier for citiizens to make money in the future.
codger
and here i thought you were agreeing with me in your first comment. whatever Keynes said, i am either agreeing with him or not. times change is my point. and being no scholar, i have no idea what Say really said, but I don’t think I agree with what he is said to have said here.
co rev
i don’t believe in class war either… at least not in the sense of “tax the rich to give to the poor poor.”
i am not happy that you read “class war” into anything i say short of that, such as …. the poor don’t have enough money to pay all the taxes needed for the government programs wanted mostly by the lobbyists of the rich. it really has nothing to do with class. it does have something to do with the successful co-option of the governmetn by some people who have lots of money.
CoRev
i’ll give you this. i was surprised by codger’s first comment this thread. it looked like he was agreeing with me. then he came back and assured me i was wrong about everything including my parentage. so maybe i just can’t tell.
love
thanks for the insights. it is subtleties like these that make economic theory so satisfying.
VT
I dont know how many take Says Law seriously but it was invoked in a thread earlier today or yesterday so I’ve been poking fun at it.
Jimi is probably the only one here who thinks it is a law.
Its silly in that one who wishes to sell something should not deride their possible customer. Its silly that you are trying to “win” against your trade partner. You have something he wants. If he gives you what you want for it its a win win.
“Assuming that the US does not wish to sustain further job losses, the budget deficit will inevitably deteriorate further”
Wrong connotation. How about “the budget deficit will inevitably beef up further”? 🙂
Kharris
AusterityFrom Wikipedia, the free encyclopediaFor other uses, see Austerity (disambiguation).Look up austerity in Wiktionary, the free dictionary.
In economics, austerity is when a government reduces its spending and/or increases user fees to pay back creditors. Austerity is usually required when a government’s fiscal deficit spending is felt to be unsustainable.
———————————————————————————————————————-
Ummmmmm it looks like there is an ACTUAL meaning of the word austerity in ECONOMICS that has everything to do with fiscal deficit reduction.
Just sayin’
VtCodger: “To my mind, the United States in particular has adopted a policy of consume now. pay later. Later is rising in the East and we are trying to blame that on someone other than ourselves.”
The thing is, we have already paid. In dollars. For many years the dollar has been the world’s reserve currency, which means that foreigners want them. Later they will pay us with those dollars. 🙂
VtC: “If we’d been a bit more seriously “merchantilist” ourselves maybe we would not have embraced free-lunch economics and ill-found free trade agreements with so much enthusiasm.”
When the U. S. was a developing nation, we were great merchants and exporters, the “Yankee Trader”. It is natural for developing countries to export to rich countries. The Chinese of old might well have regarded the stuff that they send us as a kind of tribute. Not a bad way to look at it. 🙂
As for the free trade agreements, I also think that they were probably ill-founded, favoring multi-nationals too much.
greg
hoping you are not taking issue with me about “actual.” harris could have made any number of substantive points which might or might not have been valid, or at least agreed with by someone.
instead he/she has set himself up as the final arbiter of language, logic, and honesty.
showing what i would argue is more than a little evidence of flaming paranoid delusions, not to mention mistaken identity. we, all of us, use language “approximately” to point at what we mean, not to “say it” beyond equivocation. a certain level of manners, not to say sanity, allows us sometimes to approach an understanding of what the other guy means, if not agree with him.
buff/cedric:
Not true, those making >$250,000 were the beneficiaries of the 2001/2003 tax breaks. Time to recoup the $2 trillion back into the budget
Ray, Germany’s imposition of severe fiscal restraint on the other members of the euro zone and it’s corresponding reluctance to counter any significant domestic demand stimulation is tantamount to mercantiism. Germany pursues full employment through exports and restraining domestic consumption. Then gets angry at other countries like Greece, etc., that must run deficits to create full employment. As Marshall explained, not every country, by definition can have current account surpluses. If Germany’s going to create its jobs by being competitive, less competitive EU countries will have to do it through building leverage in the private or govt sectors. If another country were to replicate Germany’s approach, Germany would be the one needing larger govt deficits. In other words, some country will be less competitive and will need govt deficits. It’s just accounting.
Kharris, Obama has championed a commission to study how to cut the deficit, he has persistently championed “pay-go” programs, discretionary spending freezes and has repeatedly embraced a paradigm which suggests that “we are running out of money”. His State of the Union was a perfect example. There are so many examples, I honestly didn’t think it would be necessary to highlight all of them, Here’s one example:
http://www.nytimes.com/2009/12/04/us/politics/04jobs.html?_r=2&hp
His point “We don’t have enough public dollars to fill the hole of private dollars that was created as a consequence of the crisis” is preposterous. Any advisor who wrote that should be dismissed. The President should resign immediately because he isn’t qualified to lead the largest economy in the world.
The US dollar, last time I knew, is issued by one institution only. That institution is the US government. It issues the US dollar under monopoly conditions. The issuance of US dollars is accomplished, in the main, by electronic transactions between the US Government and the commercial banking system.
A keyboard operators within the US Government could type 1,000,000 billion or 1,000,000,000 billion into their computer when making one of these electronic transactions and the funds would show up as increased reserves in the banking system. It might be undesirable that the higher amount actually was injected into the spending stream (depending on the available real capacity of the economy) but that is a separate issue – not unimportant but separate.
The point is that the US Government can spend as much as it likes as long as there are goods and services available for sale.
So think about “the hole of private dollars”. What does that mean? At any point in time there is stock of productive capacity available which firms use to produce goods and services for sale. They hire workers as part of this productive capacity when they receive orders – that is, when they sense there is spending intentions.
In other words, spending has to be at a certain level at any point in time to ensure that firms are willing to maximise the utilisation of their productive capacity which in turn maximises employment. Over time, growth in spending has to keep pace with growth in productive capacity (the real capacity of the economy to produce goods and services).
The hole in private dollars is just the fall in private spending brought about by an increased saving desire. The hole means that productive capacity will become unused and the jobs that could have been applied to that capacity are lost. So in March 2007, when the unemployment rate was 4.4 per cent, the total US capacity utilisation rate was 80.5 per cent. At present, in October 2009, capacity utilisation in the US was 70.7 per cent (Source). That is a very sharp decline in capacity usage which has been driven by decline in private spending.
The US Government can always “fill that hole” if it has the political will. This US government does not have that political will despite its rhetoric. The evidence for that statement is that the unemployment rate has been continually rising since March 2007.
Obama then said that his jobs forums will be rolling out across the country to find out how more jobs can be created. Does he really not have a grasp of how the economy generates jobs? Its simple, various sectors spend … the domestic private sector (consumption and investment), the foreign sector (net exports) and the public sector. The spending prompts employers to hire labour so they can produce goods and services to meet the demand. Do I need to go on?
Less spending by one […]
Say’s law was discredited by Keynes in the General Theory. The rejection of Say’s and Walras’ Law (that price and interest rate adjustments would guarantee continual full employment) was a feature of Keynes’s departure from the past thinking. In the same way that Marx had talked about effective demand, Keynes considered (even though he didn’t cite Marx as an inspiration) that aggregate demand determined employment and output levels.
This was in stark contrast to the neo-classical thinking which construed that all real variables (employment and output) were predetermined by technology (via marginal productivity) and the real wage rate in the labour market (which was the outcome of labour demand and supply). So the full employment level of output was already determined and prices just adjusted in the goods market to ensure it all sold. Compositional issues between consumption and investment demand and supply were quickly resolved via interest rate changes (a la the loanable funds doctrine).
The Great Depression showed empirically that the neo-classical theory was (and is) a total nonsense while the academic output of Keynes (and others) showed why it was nonsense.
The 28% tax bracket was reduced to 25%, and anyone with savings , a 401K, or pension plan benefited from the cap gains cut and exclusion of 50% of stock divs from tax.
But the bulk of the dollars still went to those in the upper incomes.
But I was just referring to O’s campaign and continued assertations that it’s not necessary to increase taxes on those below 250k, which is quite a lofty number considering the distribution on what the workforce really makes.
And NYC and SF would get cheaper, if all the money didn’t somehow shower upon those two locals.
Marshall,
It is not… “just accounting”. When citizens earn… and then save…then, when those savings are invested asset values remain tied to earnings. And until the cause of ‘bubbles’ can be nailed down this simple method of earning, saving, and investing is about all that is known to work.
You are accusing one of the only nations on the planet, Germany, of being too disciplined and too productive. Germany is one of the rare nations that has a formula which combines high compensation levels for its workforce while remaining competitive in the global marketplace. Branding Germans as “mercantilist”, (relative to the other developed nations), because they refuse to underwrite the very type of reliance on debt that led to Greece’s problems in first place, in the wake of a deleveraging episode of historical proportions, is pretentious. To begin with, Germans did not encourage Greeks to abstain from paying taxes so as to afford Mercedes-Benz cars. And had Greece and the other nations not imported more goods from Germany than what they could afford that does not mean that Germany would “be the one needing larger govt deficits”. It would mean instead that Germans would have needed to have made different choices based on how to manage their economy. It isn’t about accounting identities it is about working hard and about managing that work so as to maximize efficiency. Which is what the Germans do and so for them to provide discounted loans to nations based on those nations “building leverage in the private or govt sectors”, as if tweaking the numbers ‘just-so’ will solve Greece’s problems of corruption and profligate spending, well… for them to provide discounted loans based on such an argument is very, very, unlikely. It might be necessary first to prove that being too productive and too disciplined are detrimental to human progress. Or of course if the negative behavior traits of corrupt and unproductive could be shown to be that which accelerates human progress, that could be very convincing as well.
Ray
Marshall,
If ‘austerity’ were something that could be quantified, the resulting amount would be something well in excess of what can be eliminated globally within the limits of how much cheap capital there is available, and this is true also within the limits of deficit spending. So the question regarding how much of this quantified ‘austerity’ should be allowed to exist in Greece, or in any nation for that matter, is a question of where ‘austerity’ will do the most good, in combination to where the elimination of ‘austerity’ will do the least amount of harm. Or, one might ask if the Greek people deserve a second chance in light of the fact that their nation is corrupt to its very core; or, is there some other developing nation that might become inspired by the advantages of cheap capital and then add to global progress the way that Singapore or China has. There is too the consideration of just how many more nations will there be in similar circumstances to those of Greece’s?
What is missing from this article by Mr. Auerback is any mention of global aggregate demand (GAD). Which is odd considering that an improvement to GAD is the most critical criteria for how limited amounts of discounted IMF capital or foreign capital bail-out funds tied up by deficit spending can be justified in a world with GAD woefully short of adequate. At some point the question becomes whether discounted capital should be used to enable wealthy Greeks to evade paying taxes or whether the money is better used for development loans? Which is a rather easy question to answer on moral grounds. But of course there is the chance that Greece ends up like Argentina with poverty rates above 50%, although… that is where the ‘austerity’ issue and where it will do the most good gets interesting. Because, for a lower cost in terms of discounted capital an equal or even greater amount of ‘austerity’ can be eliminated or prevented in other countries. So ‘austerity’ in Greece, or in any relatively corrupt nation, it comes down to which population is most likely to apply the necessary pressure to bring about the much needed reforms.
Naturally, Mr. Auerback did consider the the risk to other nations if Greece were to default on its debts. These defaults though can be dealt with on a case by case basis as they arise as part of an effort to ensure that the funds are restricted to what they are intended for. Solving Greece’s corruption problem though is something that only the collective will of the Greek people can reform directly, and austerity conditions on emergency loans provide the most effective tool the IMF has to do what it can to move things forward.
There are some very interesting considerations involved concerning these bail-outs, some history being revealed, and something it seems we are likely to see more of in the near future, this article though failed to say much about the underlying issues.
Marx has fun batting around Say , as well.
No issue with you at all Coberly.
Stormy:
When I worked for the”Bosch” and Siemens; it was always dollars to deustche mark. Not much has changed. While Aurerbach’s article present article may be sloppy, history has not changed muchsince the Weimar Republic.
“By the same token, the creation of a common currency via monetary union has created market expectations that one country’s paper is as good as another, which explains why, for so many years, “fiscally profligate” nations such as Italy were able to borrow at Germanic level interest rates. But the decision a few months ago by the European Central Bank to block a basic “repo” function — namely, the purchases of a number of European commercial banks of Greek government debt and exchanging this debt via repos with the ECB for German and French government paper is what appears to have initially triggered the Greek crisis and raised issues of Athens’s potential insolvency.
From what we understand, the cessation of this repo function was largely done at the behest of the Germans, who saw this activity as a kind of “back door monetization” which would lead inevitably to inflation. This, despite the fact that the entire euro zone is characterized by huge unemployment , high output gaps, and collapsing domestic consumption. All of this at the core is being driven by Germany’s pathological fear of inflation which they see as the inevitable consequence of excessive government budget deficits. http://www.newdeal20.org/2010/04/12/the-piigs-problem-maginot-line-economics-9697/
Auerback
i am glad kharris gave you the opportunity to expand on your thesis. I think I agree with you, though there may be some things I do not understand, and would wait for a responsible reply…. not from kharris.
It would be interesting if you expanded on why you think the President and his advisors don’t do as you suggest. I can see where the “politics” might be difficult for them. But we hire them to do the politics… unless of course they are working for someone else.
and let me add that i don’t think i am disagreeing with the great Keynes about the need for deficit spending. i think there is a need for government spending. whether that means that taxes cannot be raised, i would suggest depends on other variables… and the variable i see that has changed is that “the rich” are sitting on huge piles of “cash” today… that might as well be taxed to manage a deficit already problematic. whether the problem is purely political or also “economic” i can’t say. but my intuition is that a small tax increase would not hurt.
cedric:
Its not necessary to raise taxes on the bulk of payroll wage earning population making < $200,000 annually. What is necessary is to get the 6million people sitting in Not In Labor Force and the other 7 million sitting in Unemployed and there will be more than enough revenue. Raising taxes on those who have income through payroll wages is senseless and self defeating as 50% of the taxpayers has seen no increase in income since 2001 as compared to the 5% of the taxpayers who have experienced increases in income. Obama’s plan is the lesser of two evils
Run
the point of taxes is not, or should not be, to hold you harmless for other injustices in the economy. I’d like to see the rich pay the whole bill myself. But no real harm would come if the poor and especiall the poor middle class had their taxes raised, progressively, from a percent at the bottom to five percent (more) at the middle… if that’s what it takes to convince the rich that they are not being hard put upon. Back in the old days working people had a sense of honor and they took some pride in paying their fair share.
coberly:
Wrong coberly, real harm has come since the eighties. More and more of the productivity gains have been skewed away from payroll wages (Labor) towards Capital as Spencer has so eloquently pointed out here: http://2.bp.blogspot.com/_Zh1bveXc8rA/SuddUhLWUaI/AAAAAAAAA7M/iU2gefk317M/s1600-h/Clipboard01.jpg as taken from here: http://www.angrybearblog.com/2009/10/labors-share.html “Labor’s Share.” It makes sense that taxes would be skewed towards those percentages of the population deriving a greater portion of their income from capital gains, asset appreciation, etc. By skewing taxes to the upper income levels, this percentage of the taxpayers begins to pay “their fair share” of the taxes they have escaped from since 2002 onwards. Under Hoover income declined, while under Bush; income declined for 95% of the taxpayers while the upper 5% either remained stagnant or increased. Bush did what no other president did before him by taking fairness out of the equation. You were thrown out of the life boat.
This isn’t the good old days when a high school diploma and a good work ethic guaranteed a ticket to the middle class. It disappeared with the ownership society as more of the ownership was found at the upper income stratas while thw rest of us leased. A little light reading (40 pages): http://www.americanprogress.org/kf/hertz_mobility_analysis.pdf “Undersatnding Mobility in America”
Run,
The obstacles to collective bargaining need to be removed so as to allow wages to find their natural levels. Then, when real wages rise taxes can rise also across the low end of the workforce. Higher taxes on the entire workforce are critical for aligning incentives via deductions, and for allowing the government to have influence, when needed, to stimulate by way of easing the tax burden so as to boost consumption levels.
Dale is right too about the “honor” issue. Wages have been manipulated downward to satisfy military recruitment problems. So this is a tricky proposition for a nation that wants to rule the world militarily. If the workers have better options than military service then conscription becomes necessary and resentment soon follows. But if workers are paid less than what affords them to pay taxes, resentment follows also and tax payers lose respect for non-tax payers and that leads to division between the classes. So it all comes down to respect running in both directions and when balanced wealth distribution affords the entire workforce to contribute to the tax base that reflects respect from those with influence to those with less influence and that begins a virtuous circle. What we have instead is a dynamic running the opposite way and the crime rates and the other social ills that are mostly indications of discontent. That has caused a society which is cynical and apathetic and well short of inspired. But we have a military like no other.
ray
Run
I actually agree with you, so I hope I am not wrong. But I do get very tired of people saying “don’t tax me; tax the other guy.” And having lived at the bottom of the wage scale I can say with some confidence that another 1% tax would not be noticed. Nor would another 5% at the middle income level. In terms of paying for government services this would be exactly fair. The fact that wages are unfair and that current tax practices are unfair is beside the point. I am all for raising taxes on the rich to pay for the deficit created by the tax cuts they got, and the tax dodges they enjoy. I just don’t like it when I hear a lot of whining from people who have enough money saying they can’t afford a tax increase. It makes them sound like the rich.
Thanks ray. Exactly.
Auerback
“His point ‘We don’t have enough public dollars to fill the hole of private dollars that was created as a consequence of the crisis’ is preposterous. Any advisor who wrote that should be dismissed. The President should resign immediately because he isn’t qualified to lead the largest economy in the world.”
To paraphrase, the U.S. Treasury is a bottomless pit, because it can always print more money to pay its debt. Therefore, there is absolutely no need for fiscal caution. I think you will find a number of instances in history that refute this notion. And if you argue that hyperinflation is unlikely, I would agree. But you need to weight the consequences by severity, as well as by probability.
“Ray, Germany’s imposition of severe fiscal restraint on the other members of the euro zone and it’s corresponding reluctance to counter any significant domestic demand stimulation is tantamount to mercantiism.”
That is mercantilist policy? Effective mercantilist policy would be to encourage trade partners to borrow. That is what official purchases of foreign exchange (the most effective mercantilist policy) do. In fact, China forces borrowing on its trade partners by buying foreign reserves – sort of like putting money in someone elses checking account without asking, then calling it a loan that must be repaid.
don,
It seems that we received a ‘drive-by’ lecture. Ignoring how others react to one’s opinions must make it easier to assume that one’s opinions are irrefutable? A recipe for delusion though perhaps.
The fact that the Administration is tolerating 9.7% official unemployment and near 17% U6 unemployment and not proposing a second stimulus is a classic example of imposing “austerity” on the economy. And as opposed to an adjustment in currency values being used to adjust the balance of trade, real wages in the U.S. will have to continue their decade long decline, with the decline of course falling primarily on the politically weaker groups with little or no rent seeking power (such as those possessed by finance and medical industries and CEOs and private equity fund managers in particular), to slowly adjust the U.S. trade balance to zero.
It continues to amaze me that the champions of Ricardian free trade, fail to realize that if all countries truly practiced it, and only competed based on comparative advantage, the trade balance, with periodic and random fluctuations, would be just that balanced, between imports and exports for all countries. But falling prey to an “idol of the mind,” as Lord Bacon might call it, folks like Kharris have to create a morality tail where virtuous, “ant” countries like Germany & China & Japan, run permanent surpluses, while “grasshopper” degenerate countries like Greece and the U.S.A. run permament deficits, and they to could run surpluses, if only they would be virtuous, and cut all social welfare and income supports. Please explain, Kharris, where would be the deficit if all the countries in the world ran surpluses? Mars?
Rickster,
We all understand the concept of an ‘accounting identity’. What you are failing to understand is that only one side may have an advantage if one side produces goods while the other side only produces promissory notes of a dubious value. ‘Comparative Advantage’ is of course about each side producing according to their strengths and each side being better off because of it. Currency adjustments and discounted loans are a necessary evil that require the nations with account surpluses to lose some of this advantage. This causes productive nations to be less productive while providing less than competitive nations with capital that could be allocated elsewhere in a more productive capacity.
So it is disingenuous to claim that if nations such as the US and Greece were producing enough to run surpluses too that “Mars” would need to run a deficit because the natural path of progress would lead to the hundreds of nations around the world that have billions of people, most of whom have needs that should be met…but aren’t. There are are more than a billion people who are malnourished and an even larger number who lack access to clean water. So at some point corrupt nations such as Greece and the US must produce more or consume less. This is creative destruction that has a karmic balancing effect that seems unfortunate at times but necessary because people are, as you suggested, ‘vile insects’. Which is of course why Capitalism and its inherent creative destruction works. Assigning fault though… to nations such as Germany, Japan, and China, for producing too much, is like a spoiled fat kid complaining that he didn’t make the team because the kids who did… they practiced too much.
So think of ‘austerity’ as the tough-love that the fat kid should have received before he ran up his deficits, but didn’t. In other words, had Greece and the US reciprocated in kind there would not be trade imbalances with Germany and China, there would have instead been more progress and the deficits would be where they belong, in the nations that have justifiable reasons to be in debt.
Naturally, if it can be shown that discounted capital is unlimited as to its supply, then maybe all of the kids can be fat and lazy.
Ray L. Love