Skip to main content

View Diary: A tale of two polls on the Ryan vision (34 comments)

Comment Preferences

  •  Simon Johnson Blast Phony Fiscal Crisis (0+ / 0-)

    Great article by the economist Simon Johnson in Bloomberg.

    In most countries that experience a fiscal crisis, there is no ambiguity about the situation.

    The government is unable to sell debt at a reasonable interest rate. This probably coincides with a broader shift out of domestic assets, as smart investors read the writing on the wall or in the newspapers. The currency collapses and, often, inflation accelerates. The government is forced to slash spending and, cap in hand, asks for help from the world’s least popular ambulance service: the International Monetary Fund.

    No part of this description fits the modern U.S. Rates on government debt are very low, the currency isn’t depreciating rapidly and inflation seems stable. There is no imaginable circumstance under which the U.S. would need to borrow from the IMF. Yet this great land of innovation has undeniably invented its unique kind of fiscal crisis.

    Darn right.  Many on this blog have been saying this and challenging the debt scolds.  Show us what problem the debt is creating right now.
    In 1801, when Jefferson became president, the U.S. government embarked on a policy of cutting federal spending, including for the military. The Navy, in particular, suffered years of neglect or, in modern terminology, “lack of readiness preparation.”

    What any economy needs by way of publicly provided goods varies with income level and stage of economic development. But the U.S. has always needed a robust military that is capable of protecting the country. And that’s not what remained after more than a decade of cuts in the early 1800s.

    Unfortunately, the American fiscal way -- then as now -- was to combine excessive expectations with inadequate revenue. As a result, the dominant war-hawks faction in Congress sought and achieved a confrontation with Great Britain. It pitted the world’s biggest navy against a depleted fleet in a sorry state of repair. The contest wasn’t even close.

    As a direct result, the British were able to trash Washington and burn the White House. The U.S. government didn’t default, or even come close. The fiscal crisis was a failure to deliver the public goods -- defense -- that the nation needed and expected.

    Fast-forward to today. We have a budget deficit because revenue has been allowed to fall behind government commitments. This is the net result of the George W. Bush tax cuts, two foreign wars and the unfunded expansion of Medicare. Then, a financial crisis cratered the economy and further pushed down tax revenue while increasing unemployment and poverty. And, looking at decades ahead, health-care costs (not just Medicare) threaten to undermine competitiveness or even sink the economy.

    So how does the political system respond? Most recently, with a sequestration program of across-the-board spending reductions that undermine military readiness and cut essential programs that help poor children. And now, with a budget proposal from House Republicans that slashes Medicaid, about half of which goes to protect the health of poor children.

    Does this make any sense? No, but there is likely to be a lot more of this in our immediate future.

    Correct, running a debt is a standard way that economies function.  Balancing the debt is sheer folly.  It's not a problem until it becomes hard to pay the interest OR there is doubt that you can pay the interest.

    Phoney Fiscal Crisis

    "The real wealth of a nation consists of the contributions of its people and nature." -- Rianne Eisler

    by noofsh on Mon Mar 18, 2013 at 06:17:34 PM PDT

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site