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View Diary: Tax policy and financial crisis (15 comments)

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  •  Why don't (0+ / 0-)

    you try to justify that view with something beyond waving your hands at it. Dr. Thayer contends that government sequestering money by balancing the budget is an economic disincentive. You say that the resulting depressions & recessions were a conscious policy goal. Do you have some evidence? Because I know of no one who has admitted that. Volcker caused a recession and said it was on purpose to stop inflation but he didn't do it with a budget surplus, he did it with a 20% interest rate. The budget balancers all tell us what a good idea it is. Now you insist that, even if it causes recessions, we mean to do that. Why don't you find someone else who agrees?

    "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

    by johnmorris on Tue Dec 02, 2008 at 09:40:21 PM PST

    [ Parent ]

    •  You are confusing the issue (0+ / 0-)

      The data you presented were from the pre-New Deal era.  During that time the business cycle was believed to be a natural rhythm of ecoomic development.  Also, before the New Deal, there were no "recessions", economic downturns were called depressions.  After the 1930's the word depression got a bad connotation and the word recession was substituted for it.

      At no time have we "planned" to have recessions and depressions.  I never said that.

      What I said was before the New Deal we planned to have price stability.  Since wars happen, we get deficit spending for them and inflation.  So if your goal is to have zero inflation, and you have deficits and inflation during wars, that necessarily means that you are going to have to run surpluses to get deflation during peacetime.

      There was no interest rate policy at this time, the gold standard handled that automatically.

      So yes, during peacetime the US tried to run surpluses before the New Deal.  Obviously when there was a depression tax receipts fall and the government did not generate a surplus.

      Thus the peace time budget is going to show a string of surpluses, ocassionally broken by strings of deficits associated with periodic naturally-occurring depressions.  This is exactly what the data show.

      That data is NO evidence at all for an effect of balanced budgets on depressions.  To say that it is is naive.


      •  Virtually every word of that (0+ / 0-)

        is nonsense. Thayer wrote that in 1996, not pre new deal, and the reason that there were no data at the time was that there had been neither a balanced budget nor a deep recession. Both Eisenhower and Nixon strove for balanced budgets, stimulated minor recessions and primed the pump again. Four years after that essay Clinton balanced the budget and handed Bush a recession which was solved with cheap credit leading to a bank failure. The gold standard, in the USA, survived to 1973 when Nixon floated the dollar repudiating the Bretton Woods agreement. The bureaucratic forcing of the basic interest rate was invented by the Bank of England in the mid 19th century and some, outlying economists, attribute the crashes of the late 1800s's to the bank's defense of the gold standard, That was certainly the position of the bimettalists, it was the subject of William Jennings Bryan's "Cross of Gold" speech and of the Wizard of Oz books and was one of the serious fights in American history. Here's a little Keynes: the government is the largest conscious player in the economy and it has, in a democracy, a duty to care for the people. Luckily, taxing money away from rich people and spending on people in general is good for economic growth. Any mechanism that sequesters money, including balanced Federal budgets and savings by rich people, discourages growth. The historical demonstration of that principle is the inexorable succession of balanced budgets and recessions.

        "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

        by johnmorris on Wed Dec 03, 2008 at 05:47:41 PM PST

        [ Parent ]

        •  reply (0+ / 0-)

          Thayer wrote in 1996, the data you posted was from before the New Deal.  Truman, Eisenhower, Kennedy, and Johnson all strove for balanced budgets in peacetime and achieved them.  This was also the time of the postwar boom.  THe boom was NOT made possible by fiscal stimulation.

          Recessions happen.  They happened in the 1970's and 1980 when the governmetn ran deficits and they happened in the 1950's and 1960's when they did not.

          The gold standed ended in 1933.  In the Bretton woods era the world ran on an offical dollar standard.  Other nation's currencies could be exchanged for dollars at a fixed exchange rate set by that nation.  Suince the US ran hefty trade surpluses it always had large supplies of foreign currencies.  You could always exchange dollars for your own currency.  Gold never changed hands.

          However in 1971, the US no longer had adequate supplies of foreign currencies for exchange for dollars.  And when the French asked that gold be exchanged instead (as was theoretically possible) Nixon didn't give it to them. So no, there was no gold standard.

          The rest of your post is correct.  The problem was the gold standard, which led to deflation.  The surpluses were simply the means by which deflation was produced.  It is the deflation that is the bad actor, not the surpluses.

          Hence, after WWII, when we no longer had deflation in peacetime, we ran balanced budgets and got prosperity.

          Taxing rich people and spending on people in general is a balanced budget.  Deficit spending is borrowing money from rich people and spending on people.  Borrowing means more interest payments to rich people in the future.  I don't see why you advocate this.

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