This post is an attempt to take a ‘look back’ and summarize the basic economic debate we’re having today in American and in Europe too, for that matter.
One side is alarmed at the size of governments deficits and, as a result, also alarmed at the growing debt that is being accumulated. Their preferred corrective is to cut government spending and thus deficits and debt. If that is not done as soon as possible, then nations with high deficits and debt are in danger of experiencing high interest rates and high inflation rates. Under that scenario nations might not be able to shoulder their financial obligations and could renege on their obligations with catastrophic results. This side also argues that without some short term pain, in the long run the pain will be far more severe. That’s pretty much the basic argument being made by this side.
The other side argues that a great and severe recession is the cause of the current deficits, and the long term threat of debt is being created primarily by out of control increases in health care spending, both in the public and the private sector. That side prefers to attack both problems by spurring economic growth and incomes, which ends the recession and thus decreases or eliminates the current deficits, while at the same time, reforming health care systems in an effort to attack the long term debt issue that is being created by out of control health care spending increases. That’s pretty much the other side.
So the common ground is that deficits and debt must be decreased. The dispute is over how best to accomplish this common goal.
So far a major stumbling block is that one side wants to concentrate primarily on government spending cuts and is reluctant to increase taxes and revenue. The other side wants to rely on both tax increases and spending cuts. At this particular moment the spending cuts only side has accepted modest tax increases and now wants to do more government spending cuts. The revenue increasing side claims it has already accepted large cuts. Neither side is happy with the size of each other’s concessions.
With this concentration on cuts and revenue, the basic idea of improving the economy (a goal both sides say they want) is sort of an orphan and neither side has made much in the way of concession to the other. The cut side has maintained throughout that tax cuts are the best way to improve economic performance. The revenue side points out that tax cuts haven’t historically correlated to having this effect, and anyway, tax cuts increase deficits without offsetting spending cuts.
In terms of this argument, neither side has had enough of a political victory to implement their preferred policies. The revenue side has managed to get some increased, short term spending, but that’s it. The cut side has managed to get some spending reductions (about $2.4 trillion over 10 years) but not the size in spending cuts it wants. The end result economically is a muddle and, so far, while there’s been some improvement in economic performance it is considered weak and vulnerable to any further economic headwinds.
This is pretty much a summary of the debate in the US. The question is which side’s preferred methods might work best if they could be applied forcefully: Big cuts, or Big job increases? Some clues are coming out of Europe, which faces similar concerns over deficits and debt. There are important differences between European economies, governments, and policies compared to those in the US. One cannot ignore these differences in any honest analysis. But the concerns are the same. What are the differences? One, Europe is many countries that share one currency. Unlike the US there is no European central bank which can easily enforce and coordinate currency and monetary policies; Two, each country has its own sovereign government and its own unique political structure, which also impedes coordinated fiscal policies too.
In Europe the cuts people won the day politically early on. They demanded so-called ‘austerity’ level spending cuts on some members whose economies were suffering the most, even if their fiscal policies were relatively conservative (lower debt levels, no deficits) when the recession showed up. This hasn’t worked very well, as a practical matter. Those countries who’s economies seemed healthy before the recession (Ireland, Spain, Italy being the foremost examples) have seen their economies worsen substantially, showing unemployment rates not seen since the Great Depression. Even Great Britain, which is essentially a European economic engine but has its own currency, has suffered from austerity policy application and now hovers on a ‘double dip’ recession. As a result, the EU governing bodies have lightened up on monetary policies and, as was done in the US, is providing backstop guarantees, and liquidity facilities, to the most troubled EU countries. That’s helped, particularly in regards to the interest rates being charged the most troubled countries. Unemployment, however, remains very stubborn.
And that’s pretty much where everything stands. Neither side has marshaled enough political power to translate their viewpoints into strong policies. In the US, for example, infrastructure or other direct hiring such as direct money transfers to cash strapped states (something the EU cannot do) are not being done, and that’s a key component of the revenue side’s policies. For the cost cutters, major benefit and spending cuts in social safety net spending like Social Security, Medicare and Medicaid are extremely unpopular. Outside of Obamacare, which implements $716 billion in cost savings and implements a 3.8% tax hike to help match revenues with bills, nothing has been accomplished in an area both sides agree is otherwise going to be a major driver in national debt (private and public).
Beezer here. So it goes, back and forth and extremely divisive at the political level. That said, public opinion has been and continues to be in favor of job creation over almost anything else. That would seem to politically favor the revenue side whose policies heavily favor government spending on creating jobs via infrastructure spending, or in direct money transfers to states.