Tag: Budget Deficit

Perhaps it is different this time

On my daily rounds of the econosphere, including Professor Finkler’s post here, I note that Ken Rogoff’s Project Syndicate post is getting a lot of traction.

A perusal of the NYT website shows Rogoff here on the USA credit downgrade:

Europe’s plan was to have growth fix the problem. America’s plan was to have growth fix the problem. And that’s not going to work… I think it’s really starting to sink in that we’re not anywhere near an endgame.

And NYT columnist Thomas Friedman cites Rogoff here:

Why is everyone still referring to the recent financial crisis as the ‘Great Recession?’ … The phrase ‘Great Recession’ creates the impression that the economy is following the contours of a typical recession, only more severe — something like a really bad cold. … But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation. … In a conventional recession the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend. The aftermath of a typical deep financial crisis is something completely different. … It typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. … Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a ‘Great Recession.’ But, in a ‘Great Contraction,’ problem No. 1 is too much debt.

As for economists, Tyler Cowen thinks Rogoff’s contributions have legs:

I don’t expect anyone to change their mind at this point, but the “we should have had a much bigger stimulus” argument is unlikely to go down in intellectual history as the correct view.  Instead, Ken Rogoff and Scott Sumner are likely to go down as the prophets of our times.  We needed a big dose of inflation, promptly, right after the downturn.  Repeat and rinse as necessary.  But voters hate inflation and, collectively, we proved to be cowards.  Too bad.

And Peter Klein also cites Rogoff favorably, though Klein conditions his response with respect to what he believes should be the central implication:

The main point is that a recession like the present one is structural, and has nothing do with shibboleths like “insufficient aggregate demand.” I wish Rogoff (here or in his important book with Carmen Reinhart) talked about credit expansion as the source of structural, sectoral imbalances that generate macroeconomic crises.

It’s almost enough to make you want to pick up the vaunted Reinhart and Rogoff book.

UPDATE: Rogoff in the Financial Times

On the Brink

There has been much consternation these past few weeks about the federal budget and the debt ceiling, with the possibility that the ratings agencies could downgrade the U.S. credit rating.    While some cheer the possibility of a U.S. default as a necessary step to reign in spending, MIT economist Simon Johnson writes that such a default would yield rather unhappy consequences.

A government default would destroy the credit system as we know it. The fundamental benchmark interest rates in modern financial markets are the so-called risk-free rates on government bonds. Removing this pillar of the system—or creating a high degree of risk around U.S. Treasurys—would disrupt many private contracts and all kinds of transactions.

The result would be capital flight—but to where? Many banks would have a similar problem: A collapse in U.S. Treasury prices (the counterpart of higher interest rates, as bond prices and interest rates move in opposite directions) would destroy their balance sheets. There is no company in the United States that would be unaffected by a government default—and no bank or other financial institution that could provide a secure haven for savings. There would be a massive run into cash, on an order not seen since the Great Depression, with long lines of people at ATMs and teller windows withdrawing as much as possible.


But that’s not all:

Private credit, moreover, would disappear from the U.S. economic system, confronting the Federal Reserve with an unpleasant choice. Either it could step in and provide an enormous amount of credit directly to households and firms (much like Gosbank, the Soviet Union’s central bank), or it could stand by idly while GDP fell 20 to 30 percent—the magnitude of decline that we have seen in modern economies when credit suddenly dries up.

With the private sector in free fall, consumption and investment would decline sharply. America’s ability to export would also be undermined, because foreign markets would likely be affected, and because, in any case, if export firms cannot get credit, they most likely cannot produce.

Not exactly a rosy picture.

Whoa, Part II

MADISON, Wis., Feb 19 (Reuters) – Supporters of legislation to reduce public employee union bargaining power and benefits in Wisconsin were far outnumbered by opponents on Saturday, as the two sides shouted competing slogans but did not clash.

Tens of thousands have demonstrated throughout the week against Republican Governor Scott Walker’s proposed legislation, which supporters say is needed to bring spending under control and opponents contend would break the back of state worker unions.

Wisconsin is the flashpoint for a U.S. struggle over efforts to roll back pay, benefits and bargaining rights of government workers. If the majority Republicans prevail, other states could be emboldened to take on the powerful unions.

Megan McCardle at The Atlantic weighs in with a balanced, if not entirely fair piece (fairness, I suppose, depends on where you are in the debate).

For those of you who haven’t been following this, the Republican-led government is set to put in place a new budget that puts the brunt of a “tax increase” on public sector employees to balance the Wisconsin state budget.  Currently, Republicans control the governorship as well as both chambers — the House 57-38 and the Senate 19-14.  Because 20 Senators are necessary for that chamber to vote, the 14 Democrats have effectively “filibustered” by fleeing the state, prolonging the inevitable I suppose.

In the meantime, the delay has allowed for the mass demonstrations down in Madison this week and this weekend. 

UPDATE: Schumpeter Roundtable member, Cecily,  has reported back from the rallies, and informs us that UW business students have never heard of Schumpeter.  Huh?!?

Ms. Cecily has rallied the troops and is taking two buses to Mad town.  She is planning to convene at the Chapel Tuesday at 8 a.m.   If you are interested in heading to Madison, you should check in there tomorrow.

You Fix the Budget


Yesterday’s New York Time provided an opportunity for each individual to propose ways to close an estimated $400+ B Federal budget gap for 2015 and a $1.3+ B budget gap for 2030.  The exercise is structured in such a way as to show you how much “savings” is generated by each action.  For example, the complete elimination of farm subsidies would yield an estimated $14B per year.  As noted by many, including the co-chairs of the Presidents Deficit Reduction Commission (addressed in a previous blog entry), “fixing the budget” cannot be done without considering cuts in Medicare, Social Security, and Defense spending.  My first attempt can be found here.

The fundamental question, directly posed by Clive Cook in today’s Financial Times, is:  Will the President back the commission co-chairs, and thus demonstrate serious leadership, or will he – in the time honored tradition of political discourse – duck the issue?  Who will be the losers in this game of “duck, duck, goose?”