Economic Argument for Austerity Based on Excel Error?

[Ed Anger]

Libertarian Socialism

[Razgovory]

Librarytarianism.

[Jacob]

Which one is that, Jake?

I don't know fadhz, why don't you tell us?

[crazy canuck]

Thatcherism!

[Ideologue]

And a lot of theories don't work out even on paper.  E.g., keeping B-52s confined to south of the DMZ, a feasible Albucierre warp drive, or economic austerity.

[The Minsky Moment]

Government spending in the US has lagged behind previous economic recovery cycles by quite a bit.  In prior post-Bretton woods recovery cycles, spending increased gradually over the 4 year period following the recession.  But in this recession, after a jump in spending in recession year itself, spending has actually declined.  The consequence has been a fiscal drag that has prolonged the process of private sector recovery from private debt over-extension.  Indeed the biggest mistake austerity proponents make is focusing entirely on public debt levels and ignoring private debt levels.  If an increase in public indebtedness helps decrease aggregate indebtedness levels across the entire economy, then the austerity case becomes more dubious.

That said, there does appear to be a fundamental structural fiscal problem in the US.  The problem is that revenue levels as a % of GDP are simply too slow to support federal spending levels.  This problem has existed since 2001-3 when two rounds of ostensibly temporary tax cuts were effectively made permanent.  The recent fiscal compromise, while partially reversing a fraction of this revenue loss, still left the US federal government under-funded. 

[CountDeMoney]

Government spending in the US has lagged behind previous economic recovery cycles by quite a bit.  In prior post-Bretton woods recovery cycles, spending increased gradually over the 4 year period following the recession.  But in this recession, after a jump in spending in recession year itself, spending has actually declined.

The Languish anti-spenders don't care about that.  Who cares that it's actually declined?  It obviously hasn't declined enough.

That said, there does appear to be a fundamental structural fiscal problem in the US.  The problem is that revenue levels as a % of GDP are simply too slow to support federal spending levels.  This problem has existed since 2001-3 when two rounds of ostensibly temporary tax cuts were effectively made permanent.  The recent fiscal compromise, while partially reversing a fraction of this revenue loss, still left the US federal government under-funded.

They don't give a shit about that, either.  Revenue problems are not spending problems.  And stopping spending is all that matters.

[crazy canuck]

If an increase in public indebtedness helps decrease aggregate indebtedness levels across the entire economy, then the austerity case becomes more dubious.

I had not thought about it in those terms before.  Its a good point.

[Valmy]

The Languish anti-spenders don't care about that.  Who cares that it's actually declined?  It obviously hasn't declined enough.

They don't give a shit about that, either.  Revenue problems are not spending problems.  And stopping spending is all that matters.

Actually I have stated repeatedly that I care a great deal about those things.  Revenue increases are necessary.  If the American people want certain things they need to pay for them.

[CountDeMoney]

I'm not referring to you. 

[Valmy]

I'm not referring to you. 

Ah ok then.  Carry on

[Admiral Yi]

Government spending in the US has lagged behind previous economic recovery cycles by quite a bit.  In prior post-Bretton woods recovery cycles, spending increased gradually over the 4 year period following the recession.  But in this recession, after a jump in spending in recession year itself, spending has actually declined.  The consequence has been a fiscal drag that has prolonged the process of private sector recovery from private debt over-extension.  Indeed the biggest mistake austerity proponents make is focusing entirely on public debt levels and ignoring private debt levels.  If an increase in public indebtedness helps decrease aggregate indebtedness levels across the entire economy, then the austerity case becomes more dubious.

Frankly Joan this is the most bizarre austerity critique you've provided so far.

First, what is the logic of back loading Keynesian stimulus?  The whole rationale for Keynesian pump-priming is to give a boost to demand that jump starts business investment.

Second, by talking about spending trends, you ignore the actual levels of spending relative to the severity of the recessions.  That is the true comparison.

Third, of course spending declined from the first year of the recession.  You might recall we had a one-off $860 trillion stimulus package.  Do you seriously wish we had done a fresh trillion the year after that?  A trillion and a quarter the next?  You want to triple total debt instead of just doubling it, all in a time of positive growth, with unemployment 3 points off full employment?

That said, there does appear to be a fundamental structural fiscal problem in the US.  The problem is that revenue levels as a % of GDP are simply too slow to support federal spending levels.  This problem has existed since 2001-3 when two rounds of ostensibly temporary tax cuts were effectively made permanent.  The recent fiscal compromise, while partially reversing a fraction of this revenue loss, still left the US federal government under-funded.

They were effectively made permanent when they were made permanent, which was this January during the Fiskal Kliff talks.  But I've said all along that we need to restore the Clinton tax rates.

[Admiral Yi]

I'm not referring to you. 

Then who the fuck are you referring to?

The people who have been taking the "keep taxes low" line are generally the proponents of "fragile recovery, keep on deficit spending."  Your people.

[Berkut]

The Languish anti-spenders don't care about that.  Who cares that it's actually declined?  It obviously hasn't declined enough.

They don't give a shit about that, either.  Revenue problems are not spending problems.  And stopping spending is all that matters.

Actually I have stated repeatedly that I care a great deal about those things.  Revenue increases are necessary.  If the American people want certain things they need to pay for them.

I think pretty much the entire Languish group of people who are opposed to just spending more and more forever all support a broad based tax increase along with reducing the growth rate of spending to get the budget back under control.

Seedy is just foaming and raving again about imaginary people.

[The Minsky Moment]

First, what is the logic of back loading Keynesian stimulus? 

There isn't any.  I didn't suggest that.  The stimulus did its job - it helped rescue the country from threatened depression and return to a postive growth path.  But slamming the fiscal brakes compromised the sustainability of that recovery.

Second, by talking about spending trends, you ignore the actual levels of spending relative to the severity of the recessions.  That is the true comparison.

I don't know what this means.  What do you propose comparing to what?

Third, of course spending declined from the first year of the recession.  You might recall we had a one-off $860 trillion stimulus package.

You've misunderstood.  Even taking the base point the year BEFORE the recession, relative spending levels are lower relatively to the equivalent time periods in the 3 prior post-Bretton Wood recessions by about 10 percent.  That is, the ARRA stimulus, although admittedly large, has been vitiated by subsequent cuts.

The data can be found in the latest IMF WEO report: http://www.imf.org/external/pubs/ft/weo/2013/01/pdf/text.pdf
Look at the box pp 32-35.  Figure 1.1.2 shows for various countries the progress of government spending using the year prior to the recession as the base point, and comparing this recession with the 3 prior post Bretton Woods recession.  The chart for the US does show the ARRA stimulus to have been higher than average as an immediate stimulus, but it also shows that the unwinding of the stimulus was so sharp that 4 years out spending levels are considerable lower in relative terms than in the prior recessions. In particular there have been real decreases in spending each and every year of the recovery.  The IMF economists go on to note the potential macro risks that such a fiscal policy may pose given prevailing interest rates.