When someone like John H. Cochrane, a professor of finance at the University of Chicago Booth School of Business and an adjunct scholar of the Cato Institute, says the following
Austerity isn’t working in Europe.
We should ALL listen.
His recent piece for Bloomberg offers some rare flexibility from the right that is worth noting. He begins by noting a very basic reality.
As incomes decline, tax revenue drops, and it becomes harder to cut spending. A downward spiral looms.
This is the crux of why we should all be concerned about flat lining middle class incomes.
He goes on to point out that spending more (something that I have also said) is not the answer.
Where will the money come from? Greece, Spain and Italy simply cannot borrow any more. So, say the Keynesians, Germany should pay. But even Germany has limits. The U.S. can still borrow at remarkably low rates. But remember that Greece was able to borrow at low rates right up to the moment that it couldn’t borrow at all. There is nobody to bail out the U.S. when our time comes. What should we do then?
Also, a very good point. So what's the solution?
Let’s call it “Growth Now.” Forget about “stimulating.” Spend only on what is really needed. We could easily stop subsidies for agriculture, electric cars or building roads and bridges to nowhere right now, without fearing a recession.
Yep.
Rather than raise taxes further on the “rich,” driving them underground, abroad, or away from business formation, fix the tax code, as every commission has recommended. Lower marginal rates but eliminate the maze of deductions.
I could live with that. It has to be done anyway. Of course, there are difficulties.
“Structural reform” is vital to restore growth now, not a vague idea for many years in the future when the stimulus has worked its magic. It’s also a lot harder politically than the breezy language suggests. “Reform” isn’t just “policy” handed down by technocrats like rules on the provenance of prosciutto; it involves taking away subsidies and interventions that entrenched interests have grown to love, and have supported politicians to protect. They will fight it tooth and nail.
That includes D's, R's and everyone in between.
So, we know what we need to do. Who will be the first person to lead on doing it?
13 comments:
Spend only on what is really needed. We could easily stop subsidies for agriculture, electric cars or building roads and bridges to nowhere right now, without fearing a recession.
In other words you are proposing a budget that would cut more spending that Ryan's proposal which we have been told will gut the govt and move us back to 1806.
That includes D's, R's and everyone in between
And starts with Obama. He wants to layer more govt on to fix what previous layers of govt broke. Now all of a sudden you decide to split from that?
Wait.
I thought the debt doesn't matter.
Why don't we just borrow more money?
I don't think you've thought this through.
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I almost feel bad snarking on you. Could it be that you have finally verified and internalized some of the things that people here have tried to tell you?
I was thinking the same thing. But I don't think Mark sees the dichotomy.
I guess we don't have to worry about Obama making any effort at compromise.
Juris:
Would it really make any difference if he did? Drop the R vs D paradigm and break out a pocket calculator.
Homework for tomorrow:
If US interest rates reverted to the mean, what percentage of US government spending would be consumed by interest payments?
Extra credit:
Do you think interest rates will be allowed to revert to the mean?
Peter - really just a dig at Obama's #1 fanboy, that's all.
There is truth to saying the Republicans aren't serious about this - Ryan's budget barely puts a dent in spending growth. But what seriousness is there anywhere when his proposal is treated as "gutting the govt" and so forth.
This provides some context.
When stacked up against Bill Clinton's 2000 budget using constant 2005 dollars, Ryan's plan pulls in the same amount of money while spending 50 percent more.
It's amazing how far out of line exponential math can get in just ten years. It's possible Clinton "got it", and did his part to get to at least linear growth in the debt numbers.
Unfortunately, between Bush II and Obama, that ship has sailed.
The Fed purchased 61% of the bonds offered at the last US debt auction. The US essentially bought its own debt. Not only are we using a credit card to pay off a different credit card, but we ultimately own the cc company that will be the last entity standing without a chair when the music stops.
Europe goes first. I expect a nice safety flight into the USD at that point, temporarily lowering import/commodity prices for the United States. Japan falls. Then it gets bad.
How bad?
That's a great question.
For how long?
Another great question.
Answers to those two questions would be merely speculation. Debt default, either explicit - or inferred via inflation - is a mathematical certainty.
Somehow, all of you missed the part about how austerity in Europe wasn't working. Ah well, at least I tried.
juris, at this point I think it's important to think outside of the box on this stuff although I have said many times that subsidies for all parts of the energy sector, for example, should end. Honestly, we need the revenue. Remember, subsides distort markets:)
Europe goes first. I expect a nice safety flight into the USD at that point, temporarily lowering import/commodity prices for the United States. Japan falls. Then it gets bad.
How bad?
That's a great question.
For how long?
Another great question.
Ah, that sweet elixir of panic mongering. Hard to resist, isn't it? You start out by saying what's going to happen and then you pull back a little and say who really knows. What are you going to do if none of what you are predicting comes to pass? Similar to the Armageddon, religious folks, I predict that you will continue to panic monger as long as reality continues to disprove your basic ideology.
Not only are we using a credit card to pay off a different credit card, but we ultimately own the cc company that will be the last entity standing without a chair when the music stops.
I've already shown that comparing unsecured, commercial debt to government debt (especially our government debt) is a false equivalency. Please stop being dishonest about the debt and deficit. Of course, that's going to entail you not behaving like an hysterical old lady so it might be asking too much.
You know what's funny? For all your guys talk about founding fathers and the Constitution, nearly all of you would have withered in panic when this country was being founded. Life was much tougher back then and the outlook, much bleaker.
Yep. You win. Sorry for being a panic-mongering hysterical old lady who would have withered in panic.
Back to snarking you.
Thought you might have been worth something there.
My bad.
to think outside of the box
Sure, that explains the partisan sniping at Ryan and his holocaust budget. Why do you lie - and so badly?
Still no comment on someone from the Cato Institute saying that austerity is a bad idea?
I think you need to read that article a little more closely. As usual your reading comprehension isn't all that.
That article isn't saying what Mark is thinking its saying.
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