A Solution Exists…I Can Quit Any Time

Tyler Cowen writes,

Unfortunately, longer-lasting solutions require coordinated agreement among many euro-zone nations and, possibly, the broader European Union. That would include significant debt write-offs (as the International Monetary Fund is suggesting), quick moves toward better-integrated European banking institutions, and a general agreement that the European Central Bank unconditionally support troubled debt securities without trying to manipulate home governments’ policies.

I would say that a longer-lasting solution has to include adopting sustainable fiscal policies. Read the whole column. Another excerpt:

Unfortunately, the relevant governments — and their citizens — still don’t seem close to accepting the onerous financial burdens they need to face. And when those burdens are unjust to mostly innocent voters, no matter whose particular story you endorse, acceptance becomes that much tougher.

Still, we shouldn’t forget that a solution exists.

Meanwhile, back in the United States, Jonah Goldberg writes,

You could confiscate 100 percent of income over $1 million, and it would cover about a third of the deficit (and crush the economy in the process). You’d still have to deal with spending, particularly entitlement spending.

But the Democrats want to do . . . nothing. Or at least that’s the position they seemed to be taking this week.

I want to caution readers not to commit the Fundamental Attribution Error. That is, do not attribute the current political strife and apparent short-termism to the personalities of politicians. Instead, these characteristics are structural defects of a system without a hard constitutional brake against deficit spending. Absent an effective constitutional brake, deficit spending is like smoking. In theory, the politicians can quit at any time. In practice, in many cases we end up with cancer.

That is the import of Lenders and Spenders, an essay that I expect I will be linking to regularly. The point of that essay is that debt crises are easy to slide into and very difficult to get out of.

At the end of the second World War, the United States was fortunate in that (a) running deficits in peacetime was still taboo and (b) Social Security was running surpluses that the politicians had not yet put their hands on, because it was considered a separate account. Unfortunately, both of those taboos went away in the 1960s, when Keynesianism became orthodox and President Lyndon Johnson got his hands on the Social Security surpluses by changing to a “unified budget”.

Eventually, some smokers get cancer. And some deficit-spending countries succumb to the fiscal equivalent. I used to think that Europe was going to get there before the United States, because I thought that in this country we had a stronger political will to restrain deficit spending.

I am starting to change my position. The mainstream views in the United States on deficit spending now lie somewhere in between, “We can quit at any time, but now is not the time” and “We never have to quit.”

Have a nice day.

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5 Responses to A Solution Exists…I Can Quit Any Time

  1. “You could confiscate 100 percent of income over $1 million, and it would cover about a third of the deficit…”

    How about if you confiscate 100 percent of the gains over $1 million?

    • Greece and Britain demonstrate that the short term Laffer maximum for soaking the rich is substantially below 45%

      How far below is not clear, I would guess around thirty, thirty five percent.

      The long term Laffer maximum is substantially less.

      On the other hand, soaking the poor actually motivates them to work, assuming you don’t bother feeding the hungry or sheltering the homeless, so you can probably tax the poor at at least fifty percent, quite likely sixty or seventy percent.

      Thus high spending states, like Greece and Sweden, furtively creep away from taxing the rich to taxing the poor, concealing their policies in a cloud of misdirection and hypocrisy.

      What tends to happen is that they have a theoretical high tax on the rich, to rationalize their not quite so high tax on the poor, and they then loophole out the tax on the rich.

  2. Jim says:

    Instead, these characteristics are structural defects of a system without a hard constitutional brake against deficit spending.

    Arnold, what is wrong with the argument that without a federal reserve, competitive currencies and a freely floating interest rate would have made large deficits impossible decades ago. The Federal Reserve is arguably the largest contravention of the Constitution in our history (perhaps second to using the Commerce Clause to turn the Constitution inside out).

    What am I missing?

  3. Ivan says:

    At the end of the second World War, the United States was fortunate in that the Fed capped debt rates while inflation confiscated cumulative 30% of GDP from the creditors in real terms, until the Fed Accord. Maybe those other factors contributed to this easing of debt burden, and so inflation was an effect, not cause.

  4. Vishwa Jay says:

    You mentioned these quotes by people who clearly lack a fundamental understanding of how economies actually work–the people involved are people, not merely automatic processes governed by a computer (as is the case with Bitcoin and other virtual currencies).

    My observation has been this: when we have competing interests, we go with whichever one seems to offer us the most control over the resources we think we own or control. This is one reason that Bitcoin mining pools work the way they do: simple human greed which is hardwired into our survival mechanisms.

    To resolve this issue, we have to change the way that people think about things like charities, taxes, and other economic stabilizers–they aren’t the foundation of our economic system, they’re more like pressure releases! When we talk about taking money from the wealthy (and I’m not wealthy, being that I subsist on meager donations from a religious tradition that most have never heard of, along with public assistance to make up the difference), what we’re actually talking about is theft. We’re talking about stealing money from people who keep their notes hoarded like a cat lady and her too-many cats.

    A better solution is to educate society about how economics work. It means making political charities in the US with the sole purpose of bringing ideas of financial education to the public, which operate entirely on donations funded from private donors–wealthy people who want to keep their money will need to learn to let go of a little of it (up to 3% of what they own, collectively) to be able to continue to hoard, or things like OWS will pop up repeatedly over time.

    It’s not lazy complainers on the other side, either: most people who are getting reamed are pretty much hard-working citizens who pay taxes and try to live the dream that commercialism sells them. Those who are under 30 are much more difficult to market to, because they actually understand that the marketeers don’t have their best interests at heart: they just want to make their clients money so that they themselves can continue to be paid.

    But the big offenders are the big-time CEOs who take 50-million-euro-per-year paychecks, hide large stacks of cash in slush funds, and try to control the behavior of the average person they see as a lazy schmuck. They lay off hundreds of staff at USD$50k per year, when they could just as easily take a pay cut and offer their employees the same so that the economy can continue… cash flow is king.

    It’s the flow of resources that’s the problem. And the more we try to demand that other people fix the problem instead of taking matters into our own wallets, the more we create the very economic issues we are trying to avoid.

    The hole into which we continue to slide only lacks traction when we ourselves try to carry too much of the burden instead of being the ones to give freely to the economic well-being of the world. When societal attitudes about money change to a thoughtful (instead of reactionary) solution, the problems will change and probably become more manageable. Until then, we’re stuck and likely to go down with the ship.

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