Fiscal Cliff MEGATHREAD: Wile E. Economy falls off, lands in cloud at bottom

[Admiral Yi]

Sure. So in four years, after we get through this recession through the current policies on the table, we elect someone who feels the way you do. I'm 100% behind that.

Technically we're no longer in a recession.

Let's say four years from now growth is around 2% a year and unemployment is around 7%.  Should we elect someone who feels the way you do?

[Admiral Yi]

It's a matter of choice.
A country can either inflate its way out of the debt or impose losses directly on the bondholders.

Both choices are similar in that they lead to an inability to borrow at nonpunative rates.

[MadImmortalMan]

What about, you know, paying them back? That's an option too. 

[merithyn]

Technically we're no longer in a recession.

Let's say four years from now growth is around 2% a year and unemployment is around 7%.  Should we elect someone who feels the way you do?

To be honest, I think that our taxes are way too low for the society that we now live in. Based on that, I don't think that taxes should ever be as low as they are right now. Not for anyone. So, I think that once the economy is doing more than barely moving upward and unemployment is considerably lower, we need to up taxes so that we can up spending on social issues like universal medical and social security.

Not for the good of the economy, but for the good of the country.

[frunk]

It's a matter of choice.
A country can either inflate its way out of the debt or impose losses directly on the bondholders.

Both choices are similar in that they lead to an inability to borrow at nonpunative rates.

ATM I'm not sure there's been another 3 year span where it's been cheaper for the US to borrow money.  The threat is certainly in the future that it will get more expensive, but I wouldn't say that it is an immediate worry.  The inability of Congress to deal with the problem in a remotely rational way (see 1 1/2 years ago) frightens bondholders way more than the opportunity to buy more debt.

[MadImmortalMan]

As an intellectual exercise, think of a time in the last, say fifty years, when it would have been the right time to cut spending.

It might be my bias coming through, but I never thought that way before. There has to be a correct time for it, but I think most of the time we just don't think about it because the pressure is off then.

[The Minsky Moment]

It's a matter of choice.
A country can either inflate its way out of the debt or impose losses directly on the bondholders.

Both choices are similar in that they lead to an inability to borrow at nonpunative rates.

Agreed.
Debt sustainability is a concern but it has to be placed in context.
The US debt-GDP ratio of 100% is very high compared to say Norway at under 50%, moderately high compared to Germany or Canada at 80-85%, on the low side compared to Italy's 120%, and pleasantly light compared to Japan's 220%.

hypothetically if a country could borrow at 0% interest it could accumulate virtually any amount of debt because countries are immortal.
Of course we don't live in such a hypothetical world but where governments can issue debt at under 2% there is a lot of room to manuever.

The real question to ask is what is the long run cost of the economic distortions required to keep interest on public debt so low.  (the Japanese experience suggests an answer that is not very reassuring) .  It is a serious question and it explains why - contra whatevery berkut might think - I don't advocate the spend, spend, spend without end solution.  But neither am I prepared to embrace sky-is-falling hysteria.  At least not yet.

[merithyn]

As an intellectual exercise, think of a time in the last, say fifty years, when it would have been the right time to cut spending.

It might be my bias coming through, but I never thought that way before. There has to be a correct time for it, but I think most of the time we just don't think about it because the pressure is off then.

Eisenhower

[Admiral Yi]

To be honest, I think that our taxes are way too low for the society that we now live in. Based on that, I don't think that taxes should ever be as low as they are right now. Not for anyone. So, I think that once the economy is doing more than barely moving upward and unemployment is considerably lower, we need to up taxes so that we can up spending on social issues like universal medical and social security.

Not for the good of the economy, but for the good of the country.

"Barely moving upward" is pretty close to America's historical growth rate since the 1960s.  I think we've averaged around 3%.

5% unemployment is generally accepted as the "full employment" level of unemployment.  Not sure what you mean by considerably lower.

[Admiral Yi]

ATM I'm not sure there's been another 3 year span where it's been cheaper for the US to borrow money.  The threat is certainly in the future that it will get more expensive, but I wouldn't say that it is an immediate worry.

A Greek, a Spaniard, an Italian, a Portuguese, a Cypriot, or an Irishman could have said the exact same thing (and probably did) just before the shit hit the fan.

[Admiral Yi]

Agreed.
Debt sustainability is a concern but it has to be placed in context.
The US debt-GDP ratio of 100% is very high compared to say Norway at under 50%, moderately high compared to Germany or Canada at 80-85%, on the low side compared to Italy's 120%, and pleasantly light compared to Japan's 220%.

And in two and half years of  the status quo we will be Italy.

hypothetically if a country could borrow at 0% interest it could accumulate virtually any amount of debt because countries are immortal.
Of course we don't live in such a hypothetical world but where governments can issue debt at under 2% there is a lot of room to manuever.

But that's not the relevant question.  Rather we should ask what we will be charged to roll over that debt when it matures.

[Berkut]

It's also a formula for kicking the can down the road and aggravating the problem.  The most popular time to start a diet is next Monday.  The most popular time to cut a deficit is a couple years from now, when things are better.

Seems that when things are better in a few years you're better off electing a Democrat like Clinton rather than a Republican like Bush. Seems more likely that the deficit will actually be shrunk, then.

Hey, no argument from me - my point is NOT that we would be better of with Republicans in charge- certainly history has shown that is not the case.

MY point is simply that the Dems don't seem to do more than pay passing lip service to the idea of ever cutting spending, or even just not increasing it.

Even Joan, while he tells us how Clinton did not increase spending faster than revenues (he didn't cut anything, of course) is telling us out of the other side of his mouth that we should be spending more even now.

Clinton spent more - he didn't cut anything. When times were good, what was the right thing to do? Spend more money!

Times were really bad a few years ago, and the answer? Spend a LOT more money!

Times are tough now, but we are recovering, and what should we do? Why, we should spend MORE money!

I am no fiscal conservative "hawk" - I just think at some point we should maybe possibly consider not spending more moeny we don't have. I am not economist, and don't pretend to be any kind of expert, but simple and common sense should say that even for the wealthiest nation on earth, there must be SOME point where we should start being concerned about spending money we do not have.

And my experience with the Dems is that that point is never, ever, EVER today.

[The Minsky Moment]

As an intellectual exercise, think of a time in the last, say fifty years, when it would have been the right time to cut spending.

Define terms - do you mean cut spending absolutely, in real terms, or in %GDP terms.
From a purely fiscal management POV, what matters in %GDP terms.  (i.e. without taking any ideological position re the appropriate role and scope of government).

With that in mind, I would say the following dates (what actually happened in parens):
1950-1953  (spending increased)
1955-1957  (spending increased)
1960-1968 (spending decreased up to 1965, increased from 1966-1968)
1971-1972 (spending decreased)
1976-1978 (spending decreased)
1984-1989 (spending increased in 84-85 and then went down)
1993-2000  (spending decreased.  A lot.)
2004-2006  (spending increased slightly).

Focusing on the increases -
1950-53 involved a huge increase in military spending, ramping up for Cold War including of course the fighting in Korea
1955-57 was Ike building the interstate highway system and spending money on housing.
1966-68 was LBJ trying to fund the Great Society and escalate Vietnam at the same time.  Of the two effects, the military one was larger.
1984-86  Reagan increasing military spending.  Medicare costs also went up.
2004-06  Same as above - Bush fighting Iraq/GWOT and Medicare spending.

Of those I give Truman and Reagan passes.  The Cold War had to be fought and while some of the mid-80s spending was wasteful it's hard to argue with results.
I give Ike a qualified pass.  If you are going to spend in the boom, spend on infrastructure projects likely to increase future growth potential.
LBJ committed a now classic blunder; he could have gone for guns or butter but not both.  Bush made the same mistake and compounded by piling it on the second tax cut.

[derspiess]

I don't see any evidence that Obama has been irresponsible with respect to fiscal policy.

Of course you don't.  You never criticize him for anything.

Do you still stand by your "The US wasn't really running a surplus in the 1990's" thing?

[Razgovory]

It looked like it got shot down, I wondered if you wanted to defend it.