Fiscal Crisis Response

It seems to me….

A clear lesson of history is that a ‘sine qua non’ for sustained economic recovery following a financial crisis is a thoroughgoing repair of the financial system.” ~ Janet Yellen[1].

Every major economy realized by late 2008 that conventional monetary policy, which involves pushing down the interest rate on short-term government debt, was going to be insufficient to combat any possible financial downturn[2]. The textbook response is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets.

Conservatives resisted this response as it leads to a budget deficit (which, as it turned out, actually is beneficial). A depressed economy even with zero interest rates is an economy in which the public is trying to save more than businesses are willing to invest. In such an economy the government does everyone a service by running deficits and giving frustrated savers a chance to put their money to work. Nor does this borrowing compete with private investment. An economy where interest rates cannot decline any lower is an economy with savings without any place to go; deficit spending that expands the economy is likely to lead to higher private investment than would otherwise be likely.

President Obama pushed through a stimulus that, while too small and short-lived, helped diminish the depth and duration of the 2007-2009 financial crisis[3]. But when Republicans expressing their desire for additional austerity declaring that the government should match the belt-tightening of ordinary families[4], a policy likely to have resulted in a full depression, President Obama unwisely did not challenge their position.

Budget deficits cannot be permitted to continue indefinitely as interest payments eventually become too large a share of the budget. The time to be concerned about deficits is not when interest rates are extremely low and the funds being borrowed would not otherwise be put to use.

While it is necessary to reverse any stimulus at some point, fiscal support should not be reduced until that point when economic improvement is able to be self-sustaining. Instead, it is desirable to wait until there can be a handoff in which the central bank offsets the effects of declining spending and rising taxes by keeping rates low. As John Maynard Keynes wrote in 1937: “The boom, not the slump, is the right time for austerity at the Treasury”.

Why does big business love austerity and hate Keynesian economics? After all, corporate leaders should be expected to favor policies that produce strong sales and high profits. Scare talk about debt and deficits is often used as a cover for a very different agenda, namely an attempt to reduce the overall size of government and especially spending on social insurance. This has been transparently obvious in the U.S., where many supposed deficit-reduction plans just happen to include sharp cuts in tax rates on corporations and the wealthy even as they take away healthcare and nutritional aid for the poor.

Such self-serving policies only benefit the already well-off minority inflicting still additional hardship on those currently struggling. Now that the U.S. has sufficiently recovered from 2007 recession, it is time to allow Federal interest rates to return to more normal levels and increase tax rates to reduce the national debt. The current recovery has lasted longer without an adjustment than most recoveries. It is time to prepare the economy for the next downturn.

That’s what I think, what about you?

[1] Janet Louise Yellen is an American economist and current Chairperson of the Board of Governors of the Federal Reserve System.

[2] Krugman, Paul. The Austerity Delusion, The Guardian, http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion?CMP=fb_gu, 29 April 2015.

[3] Krugman, Paul. Triumph of the Unthinking, The New York Times, http://www.nytimes.com/2015/05/08/opinion/paul-krugman-triumph-of-the-unthinking.html?smid=fb-nytimes&smtyp=cur&bicmp=AD&bicmlukp=WT.mc_id&bicmst=1409232722000&bicmet=1419773522000&_r=0, 8 May 2015.

[4] Levi, Michelle. Boehner: Government Needs To Tighten Its Belt, Face the Nation, CBS News, http://www.cbsnews.com/news/boehner-government-needs-to-tighten-its-belt/, 8 March 2009. John Boehner stated “It’s time for government to tighten their belts and show the American people that we ‘get’ it.”

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About lewbornmann

Lewis J. Bornmann has his doctorate in Computer Science. He became a volunteer for the American Red Cross following his retirement from teaching Computer Science, Mathematics, and Information Systems, at Mesa State College in Grand Junction, CO. He previously was on the staff at the University of Wisconsin-Madison campus, Stanford University, and several other universities. Dr. Bornmann has provided emergency assistance in areas devastated by hurricanes, floods, and wildfires. He has responded to emergencies on local Disaster Action Teams (DAT), assisted with Services to Armed Forces (SAF), and taught Disaster Services classes and Health & Safety classes. He and his wife, Barb, are certified operators of the American Red Cross Emergency Communications Response Vehicle (ECRV), a self-contained unit capable of providing satellite-based communications and technology-related assistance at disaster sites. He served on the governing board of a large international professional organization (ACM), was chair of a committee overseeing several hundred worldwide volunteer chapters, helped organize large international conferences, served on numerous technical committees, and presented technical papers at numerous symposiums and conferences. He has numerous Who’s Who citations for his technical and professional contributions and many years of management experience with major corporations including General Electric, Boeing, and as an independent contractor. He was a principal contributor on numerous large technology-related development projects, including having written the Systems Concepts for NASA’s largest supercomputing system at the Ames Research Center in Silicon Valley. With over 40 years of experience in scientific and commercial computer systems management and development, he worked on a wide variety of computer-related systems from small single embedded microprocessor based applications to some of the largest distributed heterogeneous supercomputing systems ever planned.
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