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

[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.

[Razgovory]

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?

[Berkut]

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.

You know, the Dem party is not solely defined by the President.

I am not talking about which President is in charge, I am talking about what the party seems to want - meaning Congress, Dems as individuals, etc., etc.

It is great that ONE Democrat, Clinton, while he was in charge did not see it as his mission in life to increase federal spending as much as possible.

[The Minsky Moment]

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.

But the UK and the US are both fiat currency issues.  Default isn't the issue.  Inflation is.  But anyone c. 2009 making the judgment that inflation was a bigger risk than deflation needs to have their head examined and certificate of governance revoked.

The other consideration that must always be kept in mind is that economy needs to be considered as a whole.  The public sector is just one piece.  The fact of the matter is that the US *did* engage in austerity on a rather massive scale: but that austerity consisted of consumers and business enterprises sharply increasing their private savings and paying down debt.  I can't emphasize too much how vital that was to the ability of the US to recover from a collapse brought on by years of over-extension by consumers and the financial institutions that lent to them.  The willingness of the public sector to take on additional indebtedness made that recovery in private sector balance sheets possible.   The problem with public sector austerity in the context of a balance sheet recession is that it inhibits that vital process of repairing private sector indebtedness.  Thus, public austerity not only doesn't (in the US/UK context) stave off a public default, it actually increases the risks of private defaults.

It's all one economy.

[Berkut]

Right, so clearly the right thing to do is spend spend spend. The public sector can and should just spend with no consideration to any kind of balance to the budget.

Should we just not worry about raising taxes at all then, since public sector debt is apparently great?

Maybe we should cut taxes in fact, in addition to spending more and more and more. Why not?

[Razgovory]

Berkut, are you posting from an alternate dimension or what?

[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.

You know, the Dem party is not solely defined by the President.

I am not talking about which President is in charge, I am talking about what the party seems to want - meaning Congress, Dems as individuals, etc., etc.

It is great that ONE Democrat, Clinton, while he was in charge did not see it as his mission in life to increase federal spending as much as possible.

But I only know the Presidents.

Which is not entirely true, it's just that the Republicans stand out more for me than the Democrats. And to a degree, the party politics always seem to be the important entity rather than the individual personalities, which means I'm less likely to pipe in on that stuff. I may recognize that the parties don't define the policy makers, but it has felt for the last decade or longer that the policy makers as individuals aren't nearly as important as the parties. If that makes sense.

As such, the Democrats - while not perfect - have had the better economic policies from my perspective than the Republicans. That may be because I do tend to quantify them by their leaders (Bush vs. Clinton/Obama) than as they, as individuals, may vote on policies. Lazy on my part, to be sure.

[dps]

Right, so clearly the right thing to do is spend spend spend. The public sector can and should just spend with no consideration to any kind of balance to the budget.

Should we just not worry about raising taxes at all then, since public sector debt is apparently great?

Maybe we should cut taxes in fact, in addition to spending more and more and more. Why not?

If, indeed, there's no risk of default, and the threat of inflation isn't an important concern, then why not?

[merithyn]

Right, so clearly the right thing to do is spend spend spend. The public sector can and should just spend with no consideration to any kind of balance to the budget.

Should we just not worry about raising taxes at all then, since public sector debt is apparently great?

Maybe we should cut taxes in fact, in addition to spending more and more and more. Why not?

Why does it have to be all or nothing? I really dislike it when you slip into that mode. You know, as well as everyone else, that Joan is saying that we need a balanced approach - which is what we have had - that tends toward stimulus spending right now while increasing taxes and cutting spending elsewhere. That seems like a fair, balanced way to get through this very slow return from the recession.

[Admiral Yi]

But the UK and the US are both fiat currency issues.  Default isn't the issue.  Inflation is.  But anyone c. 2009 making the judgment that inflation was a bigger risk than deflation needs to have their head examined and certificate of governance revoked.

History is replete with examples of issuers of fiat currency which have defaulted.

The other consideration that must always be kept in mind is that economy needs to be considered as a whole.  The public sector is just one piece.  The fact of the matter is that the US *did* engage in austerity on a rather massive scale: but that austerity consisted of consumers and business enterprises sharply increasing their private savings and paying down debt.  I can't emphasize too much how vital that was to the ability of the US to recover from a collapse brought on by years of over-extension by consumers and the financial institutions that lent to them.  The willingness of the public sector to take on additional indebtedness made that recovery in private sector balance sheets possible.   The problem with public sector austerity in the context of a balance sheet recession is that it inhibits that vital process of repairing private sector indebtedness.  Thus, public austerity not only doesn't (in the US/UK context) stave off a public default, it actually increases the risks of private defaults.

It's all one economy.

Fair enough.  But what I fail to see is the logic behind the implicit argument that public insolvency is preferable to private insolvency.

[The Minsky Moment]

Right, so clearly the right thing to do is spend spend spend. The public sector can and should just spend with no consideration to any kind of balance to the budget.

Should we just not worry about raising taxes at all then, since public sector debt is apparently great?

Maybe we should cut taxes in fact, in addition to spending more and more and more. Why not?

If, indeed, there's no risk of default, and the threat of inflation isn't an important concern, then why not?

The risk of inflation wasn't a serious concern in 2009.
But after 3 years of adding debt, absent a credible plan to start bringing debt/GDP levels down, it could become a risk.
My point is only that panicked over-reaction -- like an instant 5% of GDP cut in spending - is like reducing the risk of some chronic condition by stabbing the patient in the heart.  That will ensure that the condition won't develop, but at a high cost.

The question I would pose to the fiscal super-hawks is this: where do the dis-savings come from that will allow the government to increase its savings?
Let's assume that the trade balance is unlikely to improve significantly and that private investment in manufacturing and services is likely to remain muted - both pretty decent assumptions over the next year (2013).
If the government is to save more, then one of two things must happen:
1) more consumer borrowing
2) a new RE investment boom
I don't think that this is yet the right time for those things to happen.  I think such a cure is worse than the disease.

[Admiral Yi]

Why does it have to be all or nothing? I really dislike it when you slip into that mode. You know, as well as everyone else, that Joan is saying that we need a balanced approach - which is what we have had - that tends toward stimulus spending right now while increasing taxes and cutting spending elsewhere. That seems like a fair, balanced way to get through this very slow return from the recession.

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.

[The Minsky Moment]

History is replete with examples of issuers of fiat currency which have defaulted.

It's a matter of choice.
A country can either inflate its way out of the debt or impose losses directly on the bondholders.
The main difference is distributional consequences.  Inflation spreads the pain more widely, but also harms vulnerable yet politically powerful groups like pensioners.
For a country like the US or UK, I would expect them to avoid the default route; smaller countries might prefer default.

[Jacob]

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.

[merithyn]

Why does it have to be all or nothing? I really dislike it when you slip into that mode. You know, as well as everyone else, that Joan is saying that we need a balanced approach - which is what we have had - that tends toward stimulus spending right now while increasing taxes and cutting spending elsewhere. That seems like a fair, balanced way to get through this very slow return from the recession.

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.

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.