Stan Collender projects policy under a GOP president in 2113

Over at his own blog, Tim Duy provided an interesting post about what we should expect fiscal policy-wise in 2013.

Tim said he saw two possibilities -- fiscal austerity or abandon fiscal austerity -- and he that he'd "like to hear the views of the gang at Capital Games and Gains." Since he quoted one of my posts from several weeks ago and mentioned me by name earlier in the piece, I will take up the challenge for my co-bloggers-in-crime at CG&G while still encouraging them to respond on their own if they're so inclined....

Tim is using "fiscal austerity" as a surrogate for spending cuts, and I strongly suspect that, if the GOP wins the White House as he asks us to assume, that at least a symbolic spending cut will be on the agenda. If the Senate goes and the House stays Republican, the cut may be more than symbolic.

But...I also expect that a tax cut will be a priority for the GOP at the same time. In fact, it's likely to be a higher, and perhaps a much higher, priority than anything they will propose on the spending side. I also expect that the GOP-proposed tax cut will increase the deficit by more than the GOP-proposed spending cut will reduce it, especially in the first two years.

Short-term pain and an increase in federal borrowing to get a long-term gain will be the battle cry. The fact that the GOP wouldn't let Obama say or so that won't matter a bit.

Is that "austerity"? I doubt it, but it will be sold as if it is.

The higher short-term deficits will also be sold as something that was required because of the budget mess Obama left us. That will be nonsense, of course, but that won't matter in the afterglow of a GOP president taking the oath of office.

Reposted from CapitalGames&Gains, Stan Collender's blog, Tim Duy Asks; CG&G Answers

(reposted under Creative Commons license)

Krugman moralizes — "Free to die"

Paul Krugman's observation that America in becoming less compassionate can be taken as a sociological observation with economic policy implications, or as liberal moralization. George Lakoff would argue that all policy decisions, being political choices, are fundamentally moral in character, since practical politics is about different worldviews based on different moral norms.

In the past, conservatives accepted the need for a government-provided safety net on humanitarian grounds. Don’t take it from me, take it from Friedrich Hayek, the conservative intellectual hero, who specifically declared in “The Road to Serfdom” his support for “a comprehensive system of social insurance” to protect citizens against “the common hazards of life,” and singled out health in particular.

Given the agreed-upon desirability of protecting citizens against the worst, the question then became one of costs and benefits — and health care was one of those areas where even conservatives used to be willing to accept government intervention in the name of compassion, given the clear evidence that covering the uninsured would not, in fact, cost very much money. As many observers have pointed out, the Obama health care plan was largely based on past Republican plans, and is virtually identical to Mitt Romney’s health reform in Massachusetts.

Now, however, compassion is out of fashion — indeed, lack of compassion has become a matter of principle, at least among the G.O.P.’s base.

Read it all at The New York Times, Free To Die

UPDATE: Read in conjunction with Joshua Holland's Has American-Style Conservatism Become a Religion?

But I think another belief may be more telling; that cutting taxes always brings in more revenues to the government's coffers. There are two reasons this claim is more a manifestation of religious dogma than just the usual spin. First, it represents a perfect article of faith – universally held among the brethren but without any discernible basis in reality (see here for more explanation).

In 2007, Time magazine reporter Justin Fox surveyed conservatives on whether they believed the myth. He found a perfect split: all conservative politicians, pundits and operatives bought into it while conservative economists or budget experts -- people who have to remain somewhat grounded in evidence -- didn't hesitate to call it out for the nonsense it is, and that included “virtually every economics Ph.D. who has worked in a prominent role in the Bush administration.”

Countering a common misconception about MMT and deficits

Here is a comment I posted over at FireDogLake in response to Larry Mishel, president of the Economic Policy Institute:

tjfxh June 5th, 2011 at 7:22 pm

comment 130

In response to Economic Policy Institute @ 106

Larry wrote: “I don’t agree completely with Jamie Galbraith’s and R Wray’s position on deficits (i.e., they never matter)”

It not the case that Galbraith, Wray and cohort say “deficits never matter.” That was Dick Cheney. They specify precisely HOW deficits matter. This is determined by sectoral balances and national accounting principles wrt macro.

The government fiscal balance, the domestic private balance and the external balance sum to zero as an national accounting identity. That is Macro 101. So if the domestic private balance is in surplus (S>I) and the country is running a CAD (foreigners saving in the nation’s currency), then the government fiscal balance must offset the demand leakage to saving or else private saving desire cannot be met.

As long as the US is deleveraging and rebuilding savings and also running an external deficit, the government fiscal balance must offset that leakage. Otherwise, either economy contracts, private debt increases, or the private sector draws down savings/sells assets. In a deflationary environment such the US now experiencing, this can result in mounting defaults and classic debt-deflation.

If there is insufficient fiscal offset of demand leakage to saving, as is the case now, then the economy will underperform and unemployment increase, Thus, we see that deficits have a very specific purpose and their appropriate size is determined by fluctuating saving desire.

Moreover, these economists say that the problem is never financial but real. As long as there are real resources available for purchase, the government can always fund their purchase. The balance between public and private is a political matter, but the government’s ability to fund its purchases is never an issue when it issues a non-convertible floating rate currency.

The only contraint on the government’s ability to fund itself as it wishes is the availability of real resources wrt money supply. If more money is created than the economy can expand to produce real resources to meet this demand, then inflation will result. As long as there is unemployment, the economy is capable of expanding and demand side inflation is remote. (This does not mean that supply side inflation cannot occur, e..g, due to an oil shock or natural disaster. But this is an entirely different matter.)

There is no problem with deficits in the short term, and the long term issue is a political one, that is, how the country decides to allocate its real resources wrt public purpose in the future — how much to defense, how much to health care, how much to the safety net, how much to infrastructure, etc. Decisions taken now will affect the quantity and quality of real resources in the future. Inappropriate concern with deficits and debt, which are pseudo-problems, will simply set the entire country back, and everyone will be worse off than otherwise.