Austerity

[kalm]

From the Atlantic monthly, a couple of charts showing how unemployment numbers and GDP follow the same curve between states that cut spending and states that didn't. Of course there's other extenuating factors but it indicates that austerity might not be that helpful, especially in regards to growth.

Is it possible that the states with deep budget cuts were also the states that would have grown slower anyway? Yes, it possible. States and cities with worse local economies have further to go to close their deficits. Do these figures tell us that high public spending is good for long-term growth? No, they don't.

What this report does tell us, however, is that there isn't any evidence that austerity does any good in a situation like ours. If I thought that the U.S. could competitively devalue our currency, run up a huge trade surplus in a global boom, and export our way to breakaway growth, please believe that I would be riding the Austerity Train hanging off the side of the economy car waving Scott Walker banners and whistling the Bill O'Reilly outtro theme. But we're not a small Scandinavian country, and it's not the 1990s, and every other major economy is either decelerating or exploding, and investors are paying us to hold their money. Tell me how austerity leads to growth again?

http://www.theatlantic.com/business/arc ... se/258825/" onclick="window.open(this.href);return false;

[Ivytalk]

This is armchair psychology, but there may be some connection between public sector cuts and private sector retrenchment. States cut spending, banks cut lending, businesses conserve cash and go slow on hiring. Not sure how much to read into those graphs.

[kalm]

This is armchair psychology, but there may be some connection between public sector cuts and private sector retrenchment. States cut spending, banks cut lending, businesses conserve cash and go slow on hiring. Not sure how much to read into those graphs.

Don't you mean "arm chair economics"?

Which I am.

[UNI88]

Is it possible that the states with deep budget cuts were also the states that would have grown slower anyway? Yes, it possible. States and cities with worse local economies have further to go to close their deficits. Do these figures tell us that high public spending is good for long-term growth? No, they don't.

This is the key statement. There are so many factors that impact growth and accounting for them is difficult and even if you do, you can't be completely sure that your numbers are accurate. I would like to see a one-to-one comparison of Illinois to Wisconsin (neighboring states with similar economies). I can say that IMO Wisconsin is much better positioned for future growth than Illinois is. Illinois needs the austerity programs that Wisconsin just went through but the elected leaders lack the political courage to enact them. The problem is that the longer they wait the greater the austerity needed in order to achieve the necessary cost reductions.

I've said it before, politicians have 3 choices to rein in runaway costs (many of them tied to health & pension benefits):
1) Raise taxes
2) Reduce the workforce
3) Reduce benefits

What Walker did in Wisconsin might be considered the least austere of the 3 choices.

[BDKJMU]

Not spending more than you take in. It is an incredibly simple concept that the US and European countries should try some time.

[CitadelGrad]

The purpose of austerity isn't to create short-term economic growth. The purpose is to return to fiscal health, allowing long-term growth without creating the conditions for the boom/bust cycles that we've seen over the past dozen years.

Nobody thinks in these terms because everyone wants instant gratification. It's one reason why I see red when dumbasses say that austerity in Europe is failing and shouldn't be pursued here. Guess what? We are going into a 1st qtr. 2013 recession with or without austerity. I'd rather come out of that recession in better fiscal condition than come out of it with inflation.

[kalm]

Is it possible that the states with deep budget cuts were also the states that would have grown slower anyway? Yes, it possible. States and cities with worse local economies have further to go to close their deficits. Do these figures tell us that high public spending is good for long-term growth? No, they don't.

This is the key statement. There are so many factors that impact growth and accounting for them is difficult and even if you do, you can't be completely sure that your numbers are accurate. I would like to see a one-to-one comparison of Illinois to Wisconsin (neighboring states with similar economies). I can say that IMO Wisconsin is much better positioned for future growth than Illinois is. Illinois needs the austerity programs that Wisconsin just went through but the elected leaders lack the political courage to enact them. The problem is that the longer they wait the greater the austerity needed in order to achieve the necessary cost reductions.

I've said it before, politicians have 3 choices to rein in runaway costs (many of them tied to health & pension benefits):
1) Raise taxes
2) Reduce the workforce
3) Reduce benefits

What Walker did in Wisconsin might be considered the least austere of the 3 choices.

But you can also make the case that he had to pay for corporate tax cuts with austerity - in other words supply side economics. In any event, austerity looks as though it doesn't lead to growth as predicted by some.

[GannonFan]

This is the key statement. There are so many factors that impact growth and accounting for them is difficult and even if you do, you can't be completely sure that your numbers are accurate. I would like to see a one-to-one comparison of Illinois to Wisconsin (neighboring states with similar economies). I can say that IMO Wisconsin is much better positioned for future growth than Illinois is. Illinois needs the austerity programs that Wisconsin just went through but the elected leaders lack the political courage to enact them. The problem is that the longer they wait the greater the austerity needed in order to achieve the necessary cost reductions.

I've said it before, politicians have 3 choices to rein in runaway costs (many of them tied to health & pension benefits):
1) Raise taxes
2) Reduce the workforce
3) Reduce benefits

What Walker did in Wisconsin might be considered the least austere of the 3 choices.

But you can also make the case that he had to pay for corporate tax cuts with austerity - in other words supply side economics. In any event, austerity looks as though it doesn't lead to growth as predicted by some.

The lack of austerity doesn't lead to growth either. Austerity isn't just cutting spending, it's also raising taxes as well. Luckily, in the US, we haven't had to necessarily confront real austerity because we still have the capability of keeping or lowering taxes while also cutting spending (best of both worlds), but we also have the capability of raising more funds through borrowing. Places like Greece just don't - there's no faith in their system and the money spigot is turned off. In their case, they have to go austere, i.e. rein in spending and raise taxes. If they don't, no one will ever lend them money again. No one is saying that austerity is going to lead to short term growth, but for some, at a certain point, it's the only thing they can do to have a prayer of growth in the future.

[kalm]

But you can also make the case that he had to pay for corporate tax cuts with austerity - in other words supply side economics. In any event, austerity looks as though it doesn't lead to growth as predicted by some.

The lack of austerity doesn't lead to growth either. Austerity isn't just cutting spending, it's also raising taxes as well. Luckily, in the US, we haven't had to necessarily confront real austerity because we still have the capability of keeping or lowering taxes while also cutting spending (best of both worlds), but we also have the capability of raising more funds through borrowing. Places like Greece just don't - there's no faith in their system and the money spigot is turned off. In their case, they have to go austere, i.e. rein in spending and raise taxes. If they don't, no one will ever lend them money again. No one is saying that austerity is going to lead to short term growth, but for some, at a certain point, it's the only thing they can do to have a prayer of growth in the future.

Those are good points, but also consider that 2/3's of our GDP is consumer spending, so when you cut public spending you can also reduce growth. For example, if people experience a reduction in healthcare benefits and have to pay more out of pocket, that's less fishing tackle and beer that they will buy at the local mercantile. Bob, the small business owner of the local mercantile can then only afford 3 employees instead of 5 and lays two of his workers off. He then decides to put off buying that new ski boat from his buddy Sam at the marina who was going to use that commission to start a college fund for his kids...and so forth.

It seems the people who push for austerity the hardest fail to recognize that we are a mixed economy.

[UNI88]

This is the key statement. There are so many factors that impact growth and accounting for them is difficult and even if you do, you can't be completely sure that your numbers are accurate. I would like to see a one-to-one comparison of Illinois to Wisconsin (neighboring states with similar economies). I can say that IMO Wisconsin is much better positioned for future growth than Illinois is. Illinois needs the austerity programs that Wisconsin just went through but the elected leaders lack the political courage to enact them. The problem is that the longer they wait the greater the austerity needed in order to achieve the necessary cost reductions.

I've said it before, politicians have 3 choices to rein in runaway costs (many of them tied to health & pension benefits):
1) Raise taxes
2) Reduce the workforce
3) Reduce benefits

What Walker did in Wisconsin might be considered the least austere of the 3 choices.

But you can also make the case that he had to pay for corporate tax cuts with austerity - in other words supply side economics. In any event, austerity looks as though it doesn't lead to growth as predicted by some.

I haven't done the research but my guess is that the corporate tax cuts were a drop in the bucket compared to the unfunded pension and health liabilities. Austerity would have been required with or without the tax cuts.

In an apples to apples austerity comparison, I would argue that Wisconsin is much, much better positioned for growth than Illinois.

I will admit that sucking money out of the economy by reducing government spending can have a negative impact on growth. The flip side of that is that sucking money out of the economy by increasing taxation to maintain public spending can also have a negative impact on growth. Add in the reality that concern over excessive government debt (plus uncertainty about government in general) tends to scare away money that might otherwise be available for investment and you get a double whammy.

[Baldy]

Those are good points, but also consider that 2/3's of our GDP is consumer spending, so when you cut public spending you can also reduce growth. For example, if people experience a reduction in healthcare benefits and have to pay more out of pocket, that's less fishing tackle and beer that they will buy at the local mercantile. Bob, the small business owner of the local mercantile can then only afford 3 employees instead of 5 and lays two of his workers off. He then decides to put off buying that new ski boat from his buddy Sam at the marina who was going to use that commission to start a college fund for his kids...and so forth.

It seems the people who push for austerity the hardest fail to recognize that we are a mixed economy.

Not sure what you're trying to say here, but a dollar is a dollar and spending is spending. Every dollar the government spends it is taking a dollar out of our pocket. To quote the greatest economic mind of the 20th century, "nobody spends somebody else's money as carefully as he spends his own. Nobody uses somebody else's resources as carefully as he uses his own." The ultimate question is, who do you expect to spend that dollar more carefully, you or the government?

[GannonFan]

Those are good points, but also consider that 2/3's of our GDP is consumer spending, so when you cut public spending you can also reduce growth. For example, if people experience a reduction in healthcare benefits and have to pay more out of pocket, that's less fishing tackle and beer that they will buy at the local mercantile. Bob, the small business owner of the local mercantile can then only afford 3 employees instead of 5 and lays two of his workers off. He then decides to put off buying that new ski boat from his buddy Sam at the marina who was going to use that commission to start a college fund for his kids...and so forth.

It seems the people who push for austerity the hardest fail to recognize that we are a mixed economy.

Not sure what you're trying to say here, but a dollar is a dollar and spending is spending. Every dollar the government spends it is taking a dollar out of our pocket. To quote the greatest economic mind of the 20th century, "nobody spends somebody else's money as carefully as he spends his own. Nobody uses somebody else's resources as carefully as he uses his own." The ultimate question is, who do you expect to spend that dollar more carefully, you or the government?

Gotta agree with the last two posters here - ultimately spending by the government is done by taking someone's money and spending it for them. Austerity becomes necessary when a government is unable to get money from an outside source (i.e. borrowing). Again, the example of the US versus Greece - both have excessive government spending, but Greece has far more compared to their GDP than we do and no one wants to lend them any more money, and they won't want to lend them more money until they show they can control spending responsibly. Therefore, austerity is their way of demonstrating a change in behavior. We aren't at that point in the US so we still have options - people (China and others) still want to lend us money so we can afford to not go completely austere and can (although a question if we should) keep taxes where they are or lower them and cut government spending. But we have options.

Austerity is basically a government version of being sent to timeout - you need to go spend time in the corner and think about what you did wrong, say you're sorry, and promise not to do it again. Just like a kid, if all they have to do is say sorry rather than also spending time in timeout then they tend not to get the message and they repeat the bad behavior again. You won't have short term growth while in timeout, but once people can feel like they can lend to you again you can have growth.

[JohnStOnge]

Ok. I'll admit I didn't read all the posts in this thread. But, obviously, if a State is experiencing economic problems that result in reduced tax revenue it's more likelly to cut spending. It's quite possible that the economic problems are the "cause" of the spending cuts.

Obviously, it could be a situation in which doing worse economically caused cutting spending rather than cutting spending causing doing worse economically.

This is a classic illustration of not using association to infer cause and effect.

[kalm]

Not sure what you're trying to say here, but a dollar is a dollar and spending is spending. Every dollar the government spends it is taking a dollar out of our pocket. To quote the greatest economic mind of the 20th century, "nobody spends somebody else's money as carefully as he spends his own. Nobody uses somebody else's resources as carefully as he uses his own." The ultimate question is, who do you expect to spend that dollar more carefully, you or the government?

Gotta agree with the last two posters here - ultimately spending by the government is done by taking someone's money and spending it for them. Austerity becomes necessary when a government is unable to get money from an outside source (i.e. borrowing). Again, the example of the US versus Greece - both have excessive government spending, but Greece has far more compared to their GDP than we do and no one wants to lend them any more money, and they won't want to lend them more money until they show they can control spending responsibly. Therefore, austerity is their way of demonstrating a change in behavior. We aren't at that point in the US so we still have options - people (China and others) still want to lend us money so we can afford to not go completely austere and can (although a question if we should) keep taxes where they are or lower them and cut government spending. But we have options.

Austerity is basically a government version of being sent to timeout - you need to go spend time in the corner and think about what you did wrong, say you're sorry, and promise not to do it again. Just like a kid, if all they have to do is say sorry rather than also spending time in timeout then they tend not to get the message and they repeat the bad behavior again. You won't have short term growth while in timeout, but once people can feel like they can lend to you again you can have growth.

We are the government...the government is us.

In the case of Wisconsin and points elsewhere, people like the Koch brothers really understand this. That's not to say over spending isn't an issue, but in the case of Greece, much of the problem also goes back to cooking their books with the help of Goldman Sachs in order to gain membership in the EU.

The point being that austerity isn't always the noble exercise its proponents crack it up to be. Show me an earnest austerity movement and I'll show you someone or something benefiting from it on the side.

[GannonFan]

Gotta agree with the last two posters here - ultimately spending by the government is done by taking someone's money and spending it for them. Austerity becomes necessary when a government is unable to get money from an outside source (i.e. borrowing). Again, the example of the US versus Greece - both have excessive government spending, but Greece has far more compared to their GDP than we do and no one wants to lend them any more money, and they won't want to lend them more money until they show they can control spending responsibly. Therefore, austerity is their way of demonstrating a change in behavior. We aren't at that point in the US so we still have options - people (China and others) still want to lend us money so we can afford to not go completely austere and can (although a question if we should) keep taxes where they are or lower them and cut government spending. But we have options.

Austerity is basically a government version of being sent to timeout - you need to go spend time in the corner and think about what you did wrong, say you're sorry, and promise not to do it again. Just like a kid, if all they have to do is say sorry rather than also spending time in timeout then they tend not to get the message and they repeat the bad behavior again. You won't have short term growth while in timeout, but once people can feel like they can lend to you again you can have growth.

We are the government...the government is us.

In the case of Wisconsin and points elsewhere, people like the Koch brothers really understand this. That's not to say over spending isn't an issue, but in the case of Greece, much of the problem also goes back to cooking their books with the help of Goldman Sachs in order to gain membership in the EU.

The point being that austerity isn't always the noble exercise its proponents crack it up to be. Show me an earnest austerity movement and I'll show you someone or something benefiting from it on the side.

Huh? So what are you saying, austerity is just a big sham? Of course someone or something is benefiting from it on the side - if you assume that banks or others that will lend money to that government that undertakes austerity and comes out of it and then starts paying back the money that is being lent to them. But how is responsible borrowing not akin to being taken advantage of? Is usury now a crime in your books? Greece did what they did with eyes wide open, and they didn't seem to worry about it until the financial spigots they were borrowing from in such large amounts suddenly closed. Greece wasn't poor, taken advantage of, poorly educated borrowers who were duped into taking on a mortgage they couldn't ever hope to afford - they were very willing politicians who cared about being elected and staying in power - financial sensibility tends to not be a prerequisitite for that role, unfortunately.

[Baldy]

We are the government...the government is us.

In the case of Wisconsin and points elsewhere, people like the Koch brothers really understand this. That's not to say over spending isn't an issue, but in the case of Greece, much of the problem also goes back to cooking their books with the help of Goldman Sachs in order to gain membership in the EU.

The point being that austerity isn't always the noble exercise its proponents crack it up to be. Show me an earnest austerity movement and I'll show you someone or something benefiting from it on the side.

Greece's books weren't cooked. Their books were already fried by the time they brought in GS to mask the massive amount of debt they owed. Greece isn't in the predicament they're in now because of Goldman Sachs. They are in this position because Greece's politicians turned the country into an entitlement society so the political class could buy votes and get themselves reelected.

[OL FU]

This is armchair psychology, but there may be some connection between public sector cuts and private sector retrenchment. States cut spending, banks cut lending, businesses conserve cash and go slow on hiring. Not sure how much to read into those graphs.

Don't you mean "arm chair economics"?

Which I am.

Economics = Philosophy

[kalm]

We are the government...the government is us.

In the case of Wisconsin and points elsewhere, people like the Koch brothers really understand this. That's not to say over spending isn't an issue, but in the case of Greece, much of the problem also goes back to cooking their books with the help of Goldman Sachs in order to gain membership in the EU.

The point being that austerity isn't always the noble exercise its proponents crack it up to be. Show me an earnest austerity movement and I'll show you someone or something benefiting from it on the side.

Greece's books weren't cooked. Their books were already fried by the time they brought in GS to mask the massive amount of debt they owed. Greece isn't in the predicament they're in now because of Goldman Sachs. They are in this position because Greece's politicians turned the country into an entitlement society so the political class could buy votes and get themselves reelected.

I already granted that spending is an issue and I think you're making a good point about politicians kicking the can down the street. But investment banks enabled the situation. The funny thing is, just like with pension funds during the financial crisis, Goldman turns around and shorts Greek debt. Again, I have a tough time seeing GS as a poor innocent and upstanding citizen in all of this. But hey, it's all legal, and there are suckers everywhere right?

[Ivytalk]

Greece's books weren't cooked. Their books were already fried by the time they brought in GS to mask the massive amount of debt they owed. Greece isn't in the predicament they're in now because of Goldman Sachs. They are in this position because Greece's politicians turned the country into an entitlement society so the political class could buy votes and get themselves reelected.

I already granted that spending is an issue and I think you're making a good point about politicians kicking the can down the street. But investment banks enabled the situation. The funny thing is, just like with pension funds during the financial crisis, Goldman turns around and shorts Greek debt. Again, I have a tough time seeing GS as a poor innocent and upstanding citizen in all of this. But hey, it's all legal, and there are suckers everywhere right?

You and I agree on one thing: no more bailouts for GS. When I knew Lloyd Blankfein, he wore torn jeans and t-shirts. He did it once, he can do it again!

[GannonFan]

Greece's books weren't cooked. Their books were already fried by the time they brought in GS to mask the massive amount of debt they owed. Greece isn't in the predicament they're in now because of Goldman Sachs. They are in this position because Greece's politicians turned the country into an entitlement society so the political class could buy votes and get themselves reelected.

I already granted that spending is an issue and I think you're making a good point about politicians kicking the can down the street. But investment banks enabled the situation. The funny thing is, just like with pension funds during the financial crisis, Goldman turns around and shorts Greek debt. Again, I have a tough time seeing GS as a poor innocent and upstanding citizen in all of this. But hey, it's all legal, and there are suckers everywhere right?

I never said GS was a poor innocent and upstanding citizen. And yes, it was legal and there are suckers everywhere. No amount of laws will completely protect suckers from making bad choices. And in the case of Greece, they made bad choices well before GS came on the scene and they continued to (and make even be continuing now) to make bad choices. Like I said, you can't completely protect suckers from themselves. And I agree with Ivy, no more bailouts for GS likes as well - they can stand behind their own decisions, good or bad, too.