The hot new trend in politics is fiscal austerity, even in countries that don't need it. It's a terrible idea, and exactly the type of thinking that prolonged the Great Depression.

Of course we need to balance the budget. But it's not significantly more urgent now than it was last year, or the year before. And the time to cut spending and raise taxes is during good times, not when we're still on the brink of deflation.

Even if the U.S. continues holding the line, we may be hurt by countries like the U.K. and Germany foolishly slashing spending when they don't need to. It's really, truly stupid behavior and it's likely to backfire. Cutting back now could easily push the world back into recession, lowering tax receipts and increasing deficits around the globe.

The deficit hawks, who were conspicuously silent during the boom times when we should have raised taxes and cut spending, have now come out of the woodwork at the worst possible moment. And if we follow their policies, we'll fall into a vicious cycle and end up completely screwed.

I can't speak for others, but my main problem has been with how the money is being spent, not the fact it is being spent at all. Some (much of) government spending increases costs for consumers by driving up labor or commodity costs. Other parts are nonsustainable subsidies and political payoffs.

I don't see your point about Germany; they have the market cornered on renewable energy and high value-added manufacturing. #1 per capita exporter in the world and their pension plan (what we'd call entitlement spending) is manageable. Germany is well-run at present, maybe better run than any major nation aside from China (whose ethics and methods are dubious and which is not democratically elected). I think maybe you chose a bad example for a decent general proposition.

Maybe you mean the fact that Germany is asking for austerity as a condition of the Greece bailout (and any future bailouts of Spain, Ireland, Italy)?

My point is that cutting spending, like raising taxes, tends to reduce growth. And right now, we need all the growth we can get. We're recovering from a serious liquidity crisis, and imposing austerity now would create a very real risk of a double-dip recession (which would further reduce tax revenues, causing bigger deficits).

You're right about Germany; it's a very strong economy. But it will suffer like everyone else if the world slides back into recession--maybe more so. German banks hold a huge amount of Greek, Italian, Spanish, Irish and Portuguese debt, and if we double-dip that debt will all go bad. German banks will be screwed. So it makes no sense for Germany to be jumping on board the austerity train and further threatening the global recovery. Yet that's exactly what Germany is doing.

http://www.nytimes.com/2010/06/08/world/europe/08germany.html

Germany holds PIIGS debt, but the austerity measures will make sure that the bonds are paid off, at least for the debt with shorter maturities. Germany is less interested (albeit still interested) in the long term growth of those nations (20+ years) and thus cares less about education spending, infrastructure, and the like. They want to make sure the debt they currently hold is paid off, first and foremost. There was a graph in NYT the other day about the interrelationship between France, Germany, England, and the PIIGS.

Any democracy is going to make some questionable choices and the German voters aren't robots. They hated to see their thoughtful budgeting over the past decade being pissed on by the PIIGS who now require (or will require) bail outs.

Re: austerity measures--there are good cuts and bad cuts. I don't think cutting pensions are a bad idea, nor freezing government employee paychecks, or even requiring people to work longer to receive a pension. There are other examples of austerity that are troubling, but the argument that governments simply must spend doesn't sit well with me. They should spend, but not on interest groups or voting blocs. Some of this is inevitable, but it needs to be limited because it is wasteful.

I think we're talking past one another. It makes sense for Germany to demand that Greece make cuts, even now. Countries like Germany, on the other hand, should not be taking actions internally that reduce demand. The article I linked talked about Germany's own internal austerity measures, not those of Greece etc.

There are "good cuts and bad cuts" in a normal environment. But right now--with Europe incredibly fragile, the U.S. recovery only beginning to take hold, China trying to rein in its economy and fend off a massive real estate bubble, and so on--there are few if any "good cuts" for a country like Germany or the U.S. The best way to reduce the budget deficit in the short term is to have a strong recovery and improve tax receipts; reducing growth by nickel-and-diming domestic spending is utterly self-defeating.

Germany isn't a great example because it's the leading exporter of high value-added manufactures. While they shouldn't cut spending, it does matter how they cut it--if they cut pensions or government employee pay, that's not a bad thing. If they're cutting the German equivalent of K-12 or college funding, that's bad. However, Germany has tended to invest in education and infrastructure better than almost anyone, so it will hurt them far less than most countries. For example, they already have solid public transit, ports, high speed trains, a "smart grid", and the like.

Any democracy is going to need to appear to be "trimming the fat". I haven't looked at their budget, but I'd be surprised if they're cutting in the "wrong" places. I'd also be shocked if they had nearly as much fat to trim in the first place--I don't think they subsidize agriculture, energy exploration, their banking sector, etc.

Germany has a well enforced VAT and high rate of personal income tax, I don't think tax receipts will be a problem. Their attitude towards taxation is very different than ours, probably as a result of spending more wisely. I know I'd have a more positive view of taxation if my taxes weren't going towards special interests and old people but nationwide public broadband and a smart grid.

Regardless of where you cut, cutting government spending pulls money from the economy and reduces demand. If Germany cuts government employee pay, as you recommend, government employees will spend less. Companies that rely on that spending will then cut jobs or reduce hiring, both in Germany and in the countries that export to Germany. The world is interconnected. Fewer government employees may vacation in Greece. Fewer may buy baked goods made with American grain. And so on. All of which is particularly bad at a time when unemployment is still rising throughout Europe, and barely beginning to fall in the U.S.

http://krugman.blogs.nytimes.com/2010/06/06/lost-decade-here-we-come/

You clearly have your own opinions about what spending is good or bad. So do I. But that issue is irrelevant here. It's a difference between politics, where those opinions matter, and economics, where they don't. You've provided nothing to suggest that the cuts you favor are any less destructive to a budding economic recovery. In fact, cutting wages is one of the worst things we could do because income changes have a large multiplier effect (if you cut a worker's wages by $1, the economy shrinks by more than that).

http://www.ipsr.ku.edu/publicat/multipliers/multipliers.htm

Cutting government spending anywhere right now is stupid. Period. And it's simply not true that "any democracy" needs to "appear to be trimming the fat." Few Americans are crying out for immediate budget cuts (although those few get disproportionate media coverage). And Germans certainly aren't. On the contrary, the German people are wiser than their leaders.

http://blogs.wsj.com/source/2010/06/08/merkel-facing-public-protests-on-cuts/

There is absolutely no reason that cuts need to be made now. They should have been made over the past 30 years, and they should be made a couple years from now. Same goes for tax hikes. But this is simply the wrong time.

Suffice it to say, I'm not totally against budget cuts, especially in Germany's case. There are nuances beyond the general proposition that all spending is good in a downturn. For example, Germany has expressed concern about its credit rating. Credit ratings drive the debt auctions that governments use to issue debt--both short and long term. The long term debt is the bigger deal and cutting some fat certainly drives confidence that your country has the leadership and political system to allow for sensible cuts (not austerity, mind you, but restrained spending). It's not a coincidence that Germany is the standard against which all other government bonds are judged. A few other issues include the fact that government salaries drive up private sector salaries, which tends to increase unemployment; government spending can lead to price increases passed along to industries and consumers by driving up demand; and now might be a good time for Germany to take a hit for a year or two to be in prime position for future growth. Once again, if they're shrewdly trimming fat, like cutting back on certain government jobs or pensions, in the long run it is smart. There's no reason for them to run their economy like it's a sprint--that's what poorly run countries do, by demanding that things be perfect now rather than scheduling things out to achieve the best long term results.

I like Krugman and doubt he would have much to quibble with about Germany--it's a very poor example to use when discussing this issue, because they almost certainly are not going to contract because of internal spending, being an export and luxury manufacturing giant. They're at the whim of their trading partners, whose economies are far worse right now. When recovery happens, Germany will profit more than anyone because they make exactly the types of products that will be replaced in a growing worldwide economy--airplane engines, solar panels, industrial batteries, electrical components, automobile engines, switching components, etc. Meanwhile, our economy is sadly reliant on retail--it was idiotic when Bush emphasized consumer spending and it's assinine that the Obama administration has not made measureable improvements.

I'd say that Germany was shrewd if they froze government salaries or cut pensions. They aren't ruled by lobbyists and interest groups, as is Washington. Not all spending is equal--Consumer spending is not the mark of a strong economy, which is why the US is going to have massive issues taming unemployment (will take this entire decade, if it can even be done) back to pre-recession levels and balancing its budget. You can only rely on consumer spending for short periods, not to build or maintain a healthy economy over the long run. Most likely, Germany decided to take advantage of this situation to reign in pensions and government salaries (less productive than educational spending, infrastructure, and private industry) and will find themselves in a great position for the future. They're willing to take the relatively small hit (for them) in government employee and pensioner spending to shift the money to more productive endeavors. Germany, to their credit, doesn't have a shopping mall/big box store mentality. They also have a shocking ability to create private sector jobs and maintain export manufacturing industries. Meanwhile, our government grows--accounting for the majority of new jobs--and our export industries are a laughing stock. Consumer spending and real estate weren't sustainable then and continuing to hire and pay more government employees is not a sustainable answer, either.

I never said that "all spending is good in a downturn." I said that cutting spending from its pre-existing levels is bad when we're recovering from a serious credit crisis. I'm not claiming we need to spend more, just that we should wait until the economy's on solid footing to make cuts or raise taxes. As I also said repeatedly, the issue isn't just whether Germany's cuts directly lead Germany's economy to contract (I actually agree with you that, everything else held constant, Germany would benefit from certain cuts). The issue is whether Germany's beggar-thy-neighbor policies contribute to a global economic relapse that hurts both Germany and everyone else.

As for Krugman's view, he's been pretty unambiguous. If you were to read his discussions of the issue, I don't think you'd have any doubt that he agrees spending cuts are asinine right now (Germany included).

http://krugman.blogs.nytimes.com/2010/06/07/madmen-in-authority/

And at any rate, he attributes Germany's superior employment situation to targeted stimulus focused on jobs, i.e. increased government spending. What you call Germany's "shocking ability to create private sector jobs" is not an accident of fate, and didn't occur in a vacuum.

http://www.nytimes.com/2009/11/13/opinion/13krugman.html?_r=1

I have read the Krugman (what educated person doesn't read him? he might be NYT's only decent Op Ed columnist at this point, with Friedman and Rich being horrible, Brooks being blah, Dowd lacking for Bush to bash, and Kristof getting boring). I think he has good points, and clearly I read him--the "shocking ability to create private sector jobs" is a reference to Germany's focus on doing just that. They aren't focused on handing over tax receipts to old people. Government workers aren't all bad, but many positions are unproductive and overpaid. Not all assets are productive assets.

Sure. I'm all for spending cuts and tax increases to get the budget under control. I also agree that the areas where you've proposed cuts include some of the right areas. I just think we have much to lose, and little to gain, by rushing into the process.

The initial stimulus was probably too small (irrespective of how it was spent), and also likely truncated any further efforts along similar lines.

Also, while federal spending was increased, states (who have a greater impact on local economies) ran into huge deficits and began doing exactly what the hawks you lament are arguing for. I'd take it that the aggregate level of the curtailment of state spending negated most of the effectiveness that could have been hoped for from the federal plan. While money was being dolled out in pork related projects, local gvermement spending dropped in greater proportions.

I think this was the real mistake. The economic activity generated by maintaining local spending would have been a much more efficient use of the funds as most of this spending was already properly targeted and required little to none of the start up costs that the federal programs ran into.

In the 1930's we used the Home Owners Loan Corporation to buttress locale housing prices by staving off foreclosures (which typically will trace but trail employment figures). This had the effect of preventing the loss of property tax revenue, and minimizing the impact on social services (paid by local goverment) that resulted from people loosing their jobs and home. It also re/employed those in economic subsets that would be most ravaged by the downturn, namely the housing sector (the jobs losses that were based on the real estate bubble were fictitious to start with and thus represent a total squandering of both labor and pecuniary investments).

In the end this is all reactionary, and the forces that caused the 'unexpected crisis' still remain and always will. I also don't think this happened by accident.

http://druckversion.studien-von-zeitfragen.net/Conjuring%20Hitler%20Chapter%204.pdf

Read the section from pages 4-8 (take the rest for what you will, though very applicable to to-day). I see very targeted manipulation aimed at maintaining empire.

Without looking at your link, the first three paragraphs of your post are dead-on. State spending cuts and layoffs hit at the worst possible time. The federal stimulus provided some cash to the states to stave off layoffs of employees, but it wasn't enough to prevent massive cutting. I'll take a look at the link when I have time for some reading, probably later tonight.

The link is largely unrelated to the OP, but explains my warped perspective.

I'm curious what you thought about the link. The author is the foremost scholar on Thorstein Veblen, who happens to be a deity of mine.

I can't get the pdf to load. I'll try it from my work computer tomorrow.

EDIT: Got it working...I just hadn't figured out something about reading PDFs on the new laptop.

OK, I read much of this (including the pages you suggested) and skimmed the rest. I'm not sure about it. I don't have the historical background to know whether it's factually accurate, but the discussion of the Grid is reminiscent of of Illuminati-style conspiracy theories, which I always find pretty hard to credit.

It's not that I doubt malevolent people pull strings behind the scenes. It's true that human societies are afflicted with a parasitic leisure class that contributes nothing to productivity and squanders society's resources. I'm just reluctant to give too much credit to the bankers. From what I've seen, some of the most prominent people in finance are immature morons who can barely run a company, let alone orchestrate a massive manipulation spanning the globe.

In terms of whether the current crisis was an accident, it was and it wasn't. Conservative politicians and the pseudo-regulators they appointed intentionally destroyed the regulatory system and profited immensely from it when, in return, Wall Street shared the resulting riches. Bankers also took unjustified risks because they profited enormously from inflating their quarterly and annual numbers, regardless of whether it ultimately damaged the society they lived in or even the banks that employed them. So in that sense, the crisis was created by people acting intentionally. But I doubt any of them intended to inflict the crisis itself, which very few of the people in power profited from. It seems more likely that they were blinded by ideology and their own pursuit of short-term wealth, so they ignored the risks they were imposing on the rest of us.

That said, I'm sure manipulation happens all the time to some degree. High-frequency trading is a common form of parasitic market manipulation that happens every day (it now accounts for over 60% of stock market trading). I find it pretty easy to believe that smaller events like the recent "flash crash" result from intentional manipulation.

lol...the gird talk is a bit much, but to be fair, he has a valid point. Even folks like buffet note the rentier class - I remember an interview on Charlie Rose where he talked about leaving his money to hte Gates foundation in part because of his distrust over inherited wealth and its drain on productivity. That is buttressed by Gordon Wood's take on the early aristocracy in America and the shift to Jackson. Previously anyone that worked was considered poor, and only those that avioded acting in an industrious manner were considered disinterested enough to govern (Franklin - the king of puritan work ethic - had to give up all active work before he was taken serious). This concept is best explained by Veblen in the Theory of the Leisure Class (and then some). I think it would be naive to assume that it no longer is at work, and even the dominant force int he world.

Call it a conspiracy, but really its just a shift in perspective. As for the bankers, they WORK and as such are not members of that class (bankers, lawyers, etc. are the higher level clerks). I always try and reinterpret contemporary society as if I were ready a history book written in the year 2400; what would it say? Who is our aristocracy? Would it really say that the we now live int he age where the proletariat rules through democracy? Not likely. (off topic tangent - what do we do today that would shock future generations akin to reading about slavery? There must be something).

Now the reason I cited the article was that along with the notion of the grid (which Illuminati-ish as it sounds, is actually how our money system evolved, just with a crazy slant), there is the concept of how it is used to influence the great power politics. What I find most intriguing is the handling of India and the way monetary policy was used to extract gold reserves. Who is in a similar position today? The Chinese? I know that the the 'Heartland Theory' is still the basis for geopolitical strategy (still taught at West Point) and thus most actions have to be viewed through this lens. So how does it all work together? Who is being targeted? I don't take facts as occurring in a vacuum. Int eh year 2400 Pax Americana will be credited to 'American Empire' and thats just an example of how the present clouds reality.

Ultimately, I'm just playing with the concepts - true of false its just a game. However, remaining a skeptic is the foundation of progress and the advancement of thought.

Just read this. I agree with a lot of this; I'd say that a certain amount of stimulus spending was spent to temporarily slow the drop off in home prices and home sales. This money was largely wasted, just creating more transaction costs and preventing that bloated sector of the economy from thinning out. A lot of these developments were never sustainable (WaPo and NYT used to run myriad stories about the weird rationales of people living 2 hrs from the closest city to afford an overpriced house with a bad mortgage). So we offered tax credits for people to buy these properties (the prices were probably still too high) but actual, sustainable cities and counties were shorted on money and had to make cuts in services and manpower.

Another factor for me is, where the stimulus dollars are being spent. AFAIK, no federal employees were laid off or had their salaries cut. Yet, hundreds of thousands of state and local employees were laid off/furloughed/salarypwned. A lot of the spending should've been focused at the local (city/county) level.

Again, that's beside the point. Stimulus isn't the issue here. We're talking about austerity, which means reductions in pre-existing spending--spending that countries had decided was worthwhile even before this crisis hit. Regardless of whether the stimulus was well-spent or squandered, austerity right now is stupid and self-destructive.

What does that have to do with getting elected?

Austerity measures are already having the opposite effect Europeans hoped for. Rather than accepting lower interest rates on Euro government debt, borrowers are (rightly) losing confidence in the Euro governments and demanding higher rates.

http://www.nakedcapitalism.com/2010/06/axa-eurozone-breakup-a-real-possibility.html

Unsurprisingly, Moody's downgraded Greek debt to junk today and interest rates rose on Spain's latest debt issuance.

http://www.businessweek.com/news/2010-06-15/greek-swaps-show-48-5-probability-of-default-within-five-years.html

http://www.reuters.com/article/idUSTRE65D2NS20100615?type=ousivMolt

And, of course, the top holders of plummeting Greek and Spanish debt (and Spanish real estate) are none other than German and French banks and corporations.

http://www.nytimes.com/2010/04/29/business/global/29banks.html

"Austerity measures are already having the opposite effect Europeans hoped for..."

You're, of course, purposely implying the reason that Euro rates are going up are due to Austerity measures, which is completely false.

Moody's downgrades are an indirect result of too much government spending in the past. They have nothing to do with Austerity measures.

Prediction:

Germany was strong before. They'll be strong after.

Greece was a shithole before. It will be a shithole after. Atticus will blame austerity as the sole reason Greece is still a shit hole.

Hi stranger.

The more insidious issue with austerity - pointed out in the article - is the affect it will have on entitlements (almost a subtle outgrowth of the 'starve the beast' concept). By first ensuring that banks and creditors were paid through the bailouts with public funds (TARP), there now is a giant deficit that can be used to justify later curtailments under the auspice of austerity. You rack up the debt to enrage the masses, and then use the rage to facilitate cutting back on their interests in social programs. The two issues are too attenuated for most of the public to put together. Its really an amazing mechanism.

End result: TARP is paid for with your social security.

It's exactly what the right has been planning all along. They haven't even tried to hide it.

Welcome back doski.

I guess so and I should really amend my statement that its an 'outgrowth.' I just assumed (naively), that it would be more passive like 'spend lots on war so that hands would be tied for future programs.' Not 'rack up huge debt to curtail programs already in existence.' It almost makes you wonder how much of the credit crisis was really a 'crisis'. I mean its not too hard to foresee that keeping interests rates ridiculously low would lead to an overall over extension of credit whose aftermath would eventually come home to roost. So both explicit government spending AND implicit monetary policy worked in tandem to achieve the results? Scary shit.

Is this flame?

Not to this guy ('flirting with crisis is arguably part of the plan'...must be diligently following my posts here):

http://www.nytimes.com/2010/07/16/opinion/16krugman.html?src=me&ref=homepage

I love how it is the right who is planning it.

I did love your thread giving Obama an F. It made my wee wee tingle.

Who else would plan something so stupid? I've directed you to this link before: http://en.wikipedia.org/wiki/Starve_the_beast

Glad you liked the other thread. I've also come around to your view on Afghanistan, for the most part.

Except that "my" social security was never sustainable to begin with, so one in our age bracket should have never expected to have it at the levels that current retirees are funded.

That was just one example. You aren't denying the phenomenon.

http://www.bloomberg.com/news/2010-06-21/cameron-bets-on-prosperity-from-austerity-while-obama-pushes-more-stimulus.html

I read a research article today that quantitatively proved Keynes was dead wrong on this topic. It was a study of 112 instances of austerity from countries over the last 40 years and the base conclusions were that economic growth was strengthened by government spending cut based austerity programs. The lack of demand was more than compensated for by an increase in private investment.

Link?

Let me see what I can do.

I can not publicly disclose, sadly.

Your ideals in seeking austerity and that of those pushing for it are not the same. Do you really think the end result will be a balanced budget? Despite rhetoric, empirically, republicans don't have an issue with deficit spending. You won't benefit from any of the proposed cuts, in the short or long term.

Prosperity was at its highest during the era when the top income bracket was taxed the greatest. Kennedy started cutting it, and ever since then the class divide has grown and grown. This leads to greater concentration of power and a shift from control by democracy to control by capitalism. The thing is (playing with my rant), we will buy whatever item is cheaper even if we hate the way a corporation acts. The corporation can't embrace any type of moral constraint (maybe for PR), or they lose revenue and investment dries up (nor should they, its not their job). So the only way we actually put our ideals of justice into practice is through regulation (which then needs to be level across the field).

Less progressive taxing leads to a smaller middle class (keep in mind consumers drive the economy), which concentrates power which in turn bleeds into the political spectrum (lobbiest) and leads to less regulation and ever regressing tax forms.

I'm not a preaching classism, but income disparity is just not good for the economy. Hell, almost 1/3 of the billionaires in the country inherited their wealth, and these are the people pulling the strings. Those that really worked for their cash hate this class more than anyone. I suppose it cheapens their achievement. This probably has something to do with why the Buffets and Gates of the world want to give nearly all of their money away, rather than contribute to the phenomenon. They also do not believe in trickle down crap, which gets right back to the income disparity issue again.

ramble ramble ramble

Not that I think dems are any better (other side of the same coin).