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

[crazy canuck]

Economists are almost always in favor of cutting spending when things are booming, but nobody listens because "things are going well, and we don't want to mess with what works".  The problem is that cutting the deficit/debt is only ever discussed when the deficit/debt start skyrocketing.  This happens when tax revenues go down and/or gov't spending goes up, which can be an indication of recession.  If it is a recession that's the worst time to cut gov't spending. 

So yeah, there's always people saying it's the wrong time to cut spending, but it's different people at different times.

I'd like it if target gov't spending would be reduced year to year whenever the economy is doing well, but freed up again when things went south.

I am trying to recall how deficit and debt reduction became a motherhood issue in this country so that everyone got behind spending cuts and tax increases.  I cant really recall what caused it but our situation was similar to what you are going through.  Debt and spending appeared to be out of control.  But I think a major difference is we had a real fear that we would no longer be able to fund our debt - ie nobody would want to buy it.

That may be the signifcant difference.  Americans dont really see debt financing as a problem.  There is just the vague notion that paying off the debt is being off loaded to future generations without ever questioning whether you would be able to convince people to actually take the risk of continuing to underwrite that debt.

[merithyn]

But it isn't a strawman - if in fact the Dems are in favor of cutting spending, why haven't they done so?

They've been able to cut spending for the last 4+ years, and yet they have instead increased it every single year.

So it is great that they cite "plans" to cut spending, but it is not convincing since they don't actually do it - and in fact do the exact opposite, and in vast amounts, and apparently plan on more and more increased spending.

I think it was more the Republicans that got us into this mess of course, but I don't see the Dems paying more than lip service to getting us out of it.

The Dems had been until the recession. At that point, they - and most economists - believed that they needed to spend to make things better. So yes, for the last few years, that's what they've done. However, prior to the recession, it was the Dems who had cut spending and raised taxes while in office (Clinton) while the Republicans lowered taxes and increased spending while they were in office (Bush).

From my perspective, we're still reeling from Bush Jr. His policies put us in the spot we're in now, and while Obama hasn't pulled us out, he's not working with the same economic structure that Clinton was. We can't just change everything back and pray that it doesn't screw up the economy worse. It's going to take a very delicate balancing act, and I think that Obama - far more than Boehner - sees that. (At least, that's how it appears, though I expect that Boehner sees this far more than we're shown.)

[dps]

This has always been my problem with the Dems. No matter what the circumstances are, the answer is always to spend more money than last year. Things are going well, spend more. Things are going ok, spend more. Things are going badly? Holy shit, now we REALLY have to spend more!

The problem with your problem is that the facts contradict it.
When Clinton was President, federal spending/GDP declined every year he was in office.  And when the economy went into boom, the money was use to run a budget surplus and take the debt down.
And yes for a good portion of that time the GOP controlled Congress.  But the President's budgets called for the deficit reduction. 
BTW spending also fell during JFK's presidency and the first two years under LBJ.

Except that's not really true.  The budget was "balanced" or even ran a surplus under Clinton because Social Security spending wasn't being counted.  Which would have been OK if the Social Security system was running at a surplus, or even breaking even, but that wasn't the case.

[merithyn]

Except that's not really true.  The budget was "balanced" or even ran a surplus under Clinton because Social Security spending wasn't being counted.  Which would have been OK if the Social Security system was running at a surplus, or even breaking even, but that wasn't the case.

The budget was still in far better shape then than it is now. You can't argue that.

[dps]

Except that's not really true.  The budget was "balanced" or even ran a surplus under Clinton because Social Security spending wasn't being counted.  Which would have been OK if the Social Security system was running at a surplus, or even breaking even, but that wasn't the case.

The budget was still in far better shape then than it is now. You can't argue that.

We were up to our waists in quicksand then;  now we're up to our armpits.  Yeah, ok, sure, we were better off when we were up to our waists, but I don't see the point in pretending the Clinton administration had us striding on solid ground.

[The Minsky Moment]

Except that's not really true.  The budget was "balanced" or even ran a surplus under Clinton because Social Security spending wasn't being counted.  Which would have been OK if the Social Security system was running at a surplus, or even breaking even, but that wasn't the case.

Utter nonsense.  Take 1999 - whether you look purely "on-budget" or include the off budget items as well, the government was running a surplus.

[merithyn]

We were up to our waists in quicksand then;  now we're up to our armpits.  Yeah, ok, sure, we were better off when we were up to our waists, but I don't see the point in pretending the Clinton administration had us striding on solid ground.

But he did. Every economist then and now has said that the Clinton administration had us on the most solid ground that we'd been on in decades, and had we stuck with that general MO, we'd be doing far better than we are today. This is, to be frank, the first time that I've ever heard anyone say that the budget solution then was problematic.

[dps]

See, Valmy?  Told you people didn't believe it.

[The Minsky Moment]

To put the US facts in full perspective.

There have been four periods in postwar US history where deficit spending increased notably despite strong economic conditions:
1)  1957-1959
2)  1965-1968
3) 1984-1986
4)  2003-2004

There are various reasons for why these happened, but note that 3 of the 4 occurred under GOP presidents who for various reasons chose to expand federal spending.

The other is LBJ.  But note that while LBJ has (with some reason) become a kind of cautionary tale for indisciplined spending, the US public debt/GDP ratio actually declined *every year* he was President.  And that is because deficit/GDP only exceeded 1 percent in 2 years and never went over 3 percent.

The idea of the American Democratic Party as a bunch of spendthrift wastrels is a myth without basis in historical fact.

[The Minsky Moment]

See, Valmy?  Told you people didn't believe it.

This isn't theology; it's not a question of belief.  There are facts and those facts can be found in statistical accounts. 

[Berkut]

This has always been my problem with the Dems. No matter what the circumstances are, the answer is always to spend more money than last year. Things are going well, spend more. Things are going ok, spend more. Things are going badly? Holy shit, now we REALLY have to spend more!

The problem with your problem is that the facts contradict it.
When Clinton was President, federal spending/GDP declined every year he was in office.  And when the economy went into boom, the money was use to run a budget surplus and take the debt down.
And yes for a good portion of that time the GOP controlled Congress.  But the President's budgets called for the deficit reduction. 
BTW spending also fell during JFK's presidency and the first two years under LBJ.

There is a reason I think Clinton was a pretty damn good President.

The Dems since then, and previous to him, don't seem to be following that model however.

[merithyn]

There is a reason I think Clinton was a pretty damn good President.

The Dems since then, and previous to him, don't seem to be following that model however.

The only Democratic president we've had since him has been Obama, who's been handed a recession to keep in line while trying to fix what Bush Jr broke. That seems unfair to compare the two.

Prior to Clinton, I think only Jimmy Carter was a major cock-up economically speaking. Others may not have been as effective, but I don't see them as being inept.

[garbon]

There is a reason I think Clinton was a pretty damn good President.

The Dems since then, and previous to him, don't seem to be following that model however.

The only Democratic president we've had since him has been Obama, who's been handed a recession to keep in line while trying to fix what Bush Jr broke. That seems unfair to compare the two.

Prior to Clinton, I think only Jimmy Carter was a major cock-up economically speaking. Others may not have been as effective, but I don't see them as being inept.

I think he is also casting a wider net and looking at other figures with leadership.

[The Minsky Moment]

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

There is a clear comparison here.  The UK government responded to the crisis by doing exactly what the hawks here counsel - adopted an aggressive program of fiscal austerity, empahsizing cuts in government spending. In contrast, Obama pushed through a stimulus (although a fairly weak one).

The result is that while US deficits/GDP were 8.7% in 2011 and forecast for 8.5%, the UK is at 7.7% for 2011/12 -- and the latest statistical releases from the UK show government borrowing increasing.

Basically, the UK's virtuous austerity campaign has bought them nothing.  The reason is simple: while the US economy has grown since ARRA (albeit fitfully), the austerity drive helped push the UK into stagnation, denting revenue collection and putting more demand on government services.

Of course, there are other factors at play: for example the US has benefitted from an energy (shale) boom while in the UK North Sea oil is slowly declining.  But there are always other factors at play.  The bigger point is that while the Fed's relative aggressiveness and ARRA gave the US some space to recover from a classic balance sheet recession, the Cameron/Osborne hairshirt policy left zero room for maneuver for the UK.

[Admiral Yi]

Basically, the UK's virtuous austerity campaign has bought them nothing.

C'mon Joan, you're a very bright guy.  Austerity doesn't buy growth, it buys you a reprieve from the grim reaper of default.