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Spending Cuts in the Age of De-Leveraging

Lord Tammerlain

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Spending Cuts in the Age of De-Leveraging


The entire post is not bad, but I want to hightlight the following part

But what is most interesting to us is the story behind the story. Ireland is not only the European nation the farthest out to the West. It is also the one the farthest out in front in the fight against deficit spending. While others dilly-dallied, Ireland cut. It bailed out its big banks…and then had to protect its own credit. But despite deep cuts, the deficit remains stubbornly high. At 11% it is in line with the US, which hasn’t made any effort to cut at all.
What went wrong?

It appears that the neo-Keynesians Krugman and Wolf are right about at least one thing. Cutting government spending while the private sector is de-leveraging is a hard way to go. (In our opinion, it is the right way to go…but that’s another issue!)

What happens is that as the feds cut back it reduces income to the private sector, which is itself in cutback mode. This then causes tax revenues to fall – which increases the deficit

You end up with a vicious cycle of cuts, deficits and more cuts…which doesn’t worry us…but the feds don’t like it. And the public doesn’t care for it much either. Better to wait until the private sector has finished de-leveraging, say most experts.

Of course, then you are only building up public sector debt – which will have to be repaid sometime. You are also wasting resources – forever – making people absolutely poorer than they otherwise would be.
 
I tend to agree with everything that you put in bold. I am not sure what that last sentence means.
 
I tend to agree with everything that you put in bold. I am not sure what that last sentence means.

Of course, then you are only building up public sector debt – which will have to be repaid sometime. You are also wasting resources – forever – making people absolutely poorer than they otherwise would be.

If you mean this sentence. What it says is that when you pay the interest on our debt, you have less money to spend on other things. For example interest on the national debt will cost a lot more than the health care bill just passed.
 
Of course, then you are only building up public sector debt – which will have to be repaid sometime. You are also wasting resources – forever – making people absolutely poorer than they otherwise would be.

If you mean this sentence. What it says is that when you pay the interest on our debt, you have less money to spend on other things. For example interest on the national debt will cost a lot more than the health care bill just passed.

I guess specifically what I dont understand is why resources would be wasted, and did that refer to the case in which the gov does increase spending, or did that refer to the case in which the gov did not increase spending.

I understand that you are concerned about interest and such, I am also. But I am not sure that is what the author was refering to. Even in the case where the gov ramps up spending and increased the debt and the taxpayer is screwed in the future, is that interest really wasted? Sure, we all pay more in taxes to pay the interest, but then our capital providers get that interest and reinvest it back into our system - so nothing is really wasted.

I got this theory that on a macroeconomic level that money is never wasted. Sure, if I pay someone to dig a hole and then pay him to fill it back up, that seems pointless and certainly a waste of human effort. Sure, no wealth was created in the process. But if he then takes the money that I paid him and spends it or invests it, the money itself was not wasted, it just transfered hands. Thats the sad thing about the pathetic state of our government, particularly our federal government. They transfer a lot of money, but create very little. It doesn't HAVE to be that way, but I accept that until we have things like term limits, the line item veto, and more "thinkers" and fewer morons in congress, it will probably always be that way. I can envision a day where instead of wasting human effort we could create amazing infrasture which would support amazing productivity, the middle class would have the opportunity to save large amounts of money and to create large amounts of wealth, the very rich would still be very rich, and the poor would see how bad their own pathic lives are and make an effort to move into the middle class.

What I think (?) that the origional author may have been refering to as "wasting resouces forever" is that if we continue to be unemployed, the labor and effort that is no longer being utilized due to unemployment can never be regained. Once time has been wasted, it can not be recovered.

I am just not sure if the origional author was pro increased spending or anti increased spending. Sounded like pro increased spending to me. I just want to make sure that I don't distort anything.
 
I guess specifically what I dont understand is why resources would be wasted, and did that refer to the case in which the gov does increase spending, or did that refer to the case in which the gov did not increase spending.

I understand that you are concerned about interest and such, I am also. But I am not sure that is what the author was refering to. Even in the case where the gov ramps up spending and increased the debt and the taxpayer is screwed in the future, is that interest really wasted? Sure, we all pay more in taxes to pay the interest, but then our capital providers get that interest and reinvest it back into our system - so nothing is really wasted.

I got this theory that on a macroeconomic level that money is never wasted. Sure, if I pay someone to dig a hole and then pay him to fill it back up, that seems pointless and certainly a waste of human effort. Sure, no wealth was created in the process. But if he then takes the money that I paid him and spends it or invests it, the money itself was not wasted, it just transfered hands. Thats the sad thing about the pathetic state of our government, particularly our federal government. They transfer a lot of money, but create very little. It doesn't HAVE to be that way, but I accept that until we have things like term limits, the line item veto, and more "thinkers" and fewer morons in congress, it will probably always be that way. I can envision a day where instead of wasting human effort we could create amazing infrasture which would support amazing productivity, the middle class would have the opportunity to save large amounts of money and to create large amounts of wealth, the very rich would still be very rich, and the poor would see how bad their own pathic lives are and make an effort to move into the middle class.

What I think (?) that the origional author may have been refering to as "wasting resouces forever" is that if we continue to be unemployed, the labor and effort that is no longer being utilized due to unemployment can never be regained. Once time has been wasted, it can not be recovered.

I am just not sure if the origional author was pro increased spending or anti increased spending. Sounded like pro increased spending to me. I just want to make sure that I don't distort anything.

If you look at the end of the second paragraph it seems the author is against the increase in spending.

Another thing. You mentioned transfer payments as money going from one pocket to another. It seems that the stimulus money as had a multiplier of less than 1X. Thus the government did not get the stimulus that they anticipated.

The stimulus money was more like a sugar high than something that will sustain us long term. By that I mean we did not really put this money into basic research or infrastructure which would have long term benefits to our economy. Thus while we will be paying the interest forever the benefits, to the extent there were any are short term.
 
It appears that the neo-Keynesians Krugman and Wolf are right about at least one thing. Cutting government spending while the private sector is de-leveraging is a hard way to go.

Your appear to be using "de-leveraging" synonomously with reduced demand, suggesting that larger-than-usual portions of disposable incomes are being allocated to debt reduction rather than consumption of goods and services. Not quibbling, just want to make sure.

It is waaay too soon to proclaim success or failure in Ireland. This is not a light switch situation, more like a very slow-burning candle. At least another 12 - 18 months before informed judgements can be posited.

Which is also the problem with Krugman/Wolfe: They emphasize the benefits of Keynesian deficit spending today, but neglect to examine the history of elected governments when tomorrow comes and its time to embrace the other chief component of the Keynesian prescription: reducing government spending when times are good. The history of western representative government suggests that never are times "good enough" to reduce spending.

Remember Gramm-Rudman? Remember line-item vetos? How about controlling ear-marks? And all the numerous other lame attempts at putting in place spending controls, budgeting theories, etc.?

In general, whether Keynesian or not, there is a general (yes, there are exceptions) agreement among economists that there will be an appropriate time to cut spending. Some believe it is that time right here and right now; others think the current recovery too tenuous. But the prospect of politicians doing the right thing at the right time appear pretty iffy to me.

Politicians gain favor with their constituncies by enhancing their economic well-being, which doesn't mean reduced spending for their districts and its denizens. Reducing spending is inflicting pain; the only questions are, "On whom?" Which translates to, "How much and how will it be apportioned across socioeconomic groups?

Here I have to give kudos to a president that I otherwise didn't care for at all: Clinton did raise taxes at what turned out to be the right time, and a budget surplus resulted. Luck? Skill (derived from Rubin's or someone else's advice? Don't know.). But that policy move clearly illustrates the importance of timing and the inclusion of the 'sginificant other' part of the Keynesian prescription. Just my opinion. YMMV.
 
I tend to agree with everything that you put in bold. I am not sure what that last sentence means.

Of course, then you are only building up public sector debt – which will have to be repaid sometime. You are also wasting resources – forever – making people absolutely poorer than they otherwise would be.

If you mean this sentence. What it says is that when you pay the interest on our debt, you have less money to spend on other things. For example interest on the national debt will cost a lot more than the health care bill just passed.


Generally what is occuring you are spending today on consumption type items, food, cloting shelter, entertainment rather then saving the money for future investment in capital type goods which would increase wealth production in the future.

What has to be considered in my opinion, is the wasted resources of government spending today, to prevent further economic contraction (which itself is a waste of resources as people are not working, business are not producing goods and services greater or less then the cost of the wasted resources of having much of the economy idle
 
Here is what I believe is a rational analysis of what would have happened to the US economy had TARP and the stimulus not occured. Perhaps the numbers might be different by +/-20% but I really dont think their numbers are off by much

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.

The paper, by Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics, represents a first stab at comprehensively estimating the effects of the economic policy responses of the last few years.

snip

Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.

snip

If the fiscal stimulus alone had been enacted, and not the financial measures, they concluded, real G.D.P. would have fallen 5 percent last year, with 12 million jobs lost. But if only the financial measures had been enacted, and not the stimulus, real G.D.P. would have fallen nearly 4 percent, with 10 million jobs lost.
 
Here is what I believe is a rational analysis of what would have happened to the US economy had TARP and the stimulus not occured. Perhaps the numbers might be different by +/-20% but I really dont think their numbers are off by much

There are several problems with this "analysis" done by these two economists. The most glaring is that they lumped all government and federal reserve actions together. This has allowed people to say that it was stimulus spending which saved us.

So until these two break out the impacts by categort I can't this as a serious exercise.
 
There are several problems with this "analysis" done by these two economists. The most glaring is that they lumped all government and federal reserve actions together. This has allowed people to say that it was stimulus spending which saved us.

So until these two break out the impacts by categort I can't this as a serious exercise.

They did, my mistake in not including a link

http://www.nytimes.com/2010/07/28/business/economy/28bailout.html?_r=1&partner=rss&emc=rss

Here is the relavent quote

If the fiscal stimulus alone had been enacted, and not the financial measures, they concluded, real G.D.P. would have fallen 5 percent last year, with 12 million jobs lost. But if only the financial measures had been enacted, and not the stimulus, real G.D.P. would have fallen nearly 4 percent, with 10 million jobs lost.

If by by reserve actions you mean the 0% fed funds rate, no they did not seem to include that.
 
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They did, my mistake in not including a link

http://www.nytimes.com/2010/07/28/business/economy/28bailout.html?_r=1&partner=rss&emc=rss

Here is the relavent quote



If by by reserve actions you mean the 0% fed funds rate, no they did not seem to include that.

There were a number of moves that the fed and prior administration made that do seem to be included. Changing the mark to market rules; guarenteing the interbank debt; the 1.2 trillion the fed grew it's balance sheet. Those moves gave the markets some reasurances that the banking system would not go down the drain. This was a financial/credit crisis. It was stopped by stopping the run on the banks and shoring up their balance sheets. Also we should include the stress tests that were done in early 2009.

It seems that this work was done by economists that have an agenda of wanting more stimulus spending. People are still arguing about the causes of the depression in the 1930's. I doubt that there will be consensus on what caused this issue and what the best remedy was for many years to come.
 
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