General Question

cockswain's avatar

If we begin to enter another recession, should we immediately raise the debt ceiling and pass a stimulus bill?

Asked by cockswain (15186 points ) August 5th, 2011

My idea spawned from this article about a recent Robert Reich lecture. who is one of my favorite economists. As politically unpopular as it would be, he calls the national debt a non-issue in the current economic climate. Historic convention (by my understanding) is we spend our way out of a recession, arguably the most important role of the federal government.

Some economists are forecasting a second recession now would be even more vicious than the one in 2008. What do you think? As well as answering the question, feel free to suggest what a good solution to avoiding a second recession would be, or what we should do if we enter one.

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47 Answers

jrpowell's avatar

I would love round two on the stimulus. Around 70% spending and 30% tax cuts for those making under 75K per year. I’m talking about 1.5 trillion here. And going back to the pre Bush tax rates on the wealthy.

cockswain's avatar

@johnpowell Dare I say I agree? It occurred to me the other day that the biggest worry isn’t necessarily the size of the debt as it is the ratio of debt to GDP. Well, if our economy recedes, that ratio will increase all by itself, despite the debt ceiling deal. The $1.5T stimulus you propose might increase the ratio to the same amount, but at least would (hopefully) prevent our GDP from plummeting.

RealEyesRealizeRealLies's avatar

I say default on all loans and declare complete bankruptcy.

Then the US will get offers of credit coming out the ying yang… Isn’t that how it works for anyone else who declares bankruptcy? New credit offers come pouring in.

Seriously, it’s all a huge lie. Who exactly is the wealthiest government the world has ever known borrowing money from? Does anyone stop to consider that no one ever talks about the lenders, and who they are? I’ll tell you who they are… They’re bankers that create so called wealth out of thin air by punching a few digits into a computer. It’s all such a lie.

Notice how the stock market crumbled within two days of the debt ceiling raising agreement.

I tell you, when the second wave of financial collapse is upon us, it won’t be the guy with gold, or stocks, or cash, or hollow digits from a computer loan that survives… It will be the guy with a stock of gasoline, a generator, canned food and bottled water who has the real value. Money is such a lie. What exactly does that worthless paper note represent? Nothing more than someones greedy opinion. It represents their greed. It certainly doesn’t represent anything physically substantial.

Qingu's avatar

Yes, definitely. But we should pair it with a meaningful law to roll back spending and hike taxes as soon as the economy recovers (maybe tying it to a specific level of GDP or unemployment) so bond markets can be reassured that we won’t have a European-style debt crisis in the future.

Not that they need much assurance at this point since the interest rate on our bonds is insanely low despite our deficit.

Qingu's avatar

@RealEyesRealizeRealLies, the government borrows money from a number of parties; the largest creditors are China, Japan, and several other nations, but there are also private sector creditors. Here is the list:

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

And technically, money represents value. Money-based economies are also vastly more efficient than barter based economies. I’m not sure if you are advocating we go back to that or if you believe it is an looming consequence of civilization’s inevitable collapse.

flutherother's avatar

The world’s largest economies are in debt, the banks are going bust. Who do they owe all these trillions to?

Qingu's avatar

@flutherother, look at my link.

Jaxk's avatar

I know spending is touted as the solution to a recession. And I’ll admit there is some benefit from the spending. Unfortunately the benefit is much less than the cost and it only works if you continue to sped more each year. Even if you’re a believer that the Great Depression was lessened by the spending under FDR, it should be obvious that spending increased every year and never fixed the underlying problem. As soon as the spending levels off the recession/depression returns. I can see no event in history where a spurt of spending ever did anything other than raise the debt. If spending is your solution, it is a long term, ongoing solution. And frankly we can’t afford it.

Unfortunately at this point our options are limited. Tax cuts would be equally expensive. Entitlements are draining our resources and the events in Europe aren’t helping. One country after another is going down to excessive debt. Greece, Italy, Spain, Ireland, are we next?

I’m not a fan of massive cuts either but we need to slow the growth of spending. We also need to encourage businesses to grow and invest. Stability would help that immensely. Good or bad, regulations are coming fast and furious. Industry simply can’t keep up with the changes. If you’ve ever changed system in your workplace, you know that the first thing that happens is a slowdown. Everybody needs time to get used to the new rules and systems. No matter how good the new system may be. Suspend the creation of new regulation. If there is an immediate problem address it but let the rest wait til we begin recovering. That alone would go a long way in helping us out of this mess.

Qingu's avatar

There are a number of factors that make the current situation fundamentally different from the Great Depression. The first is that almost every country affected by the recession now has some form of a social safety net. Unemployment insurance, social security, medicaid, and other services help prevent people from permanantly exiting the economy (unemployed can use UI to buy food and shelter, rather than dying en masse or becoming wandering hobos).

There are also regulations in place that did, and will continue to, help the financial system. We didn’t have any runs on the banks this time, for example (though we may well have had them if the government didn’t take immediate action).

Recessions are caused by vicious cycles where consumers slow spending, industry slows production, workers get fired, which results in even less consumers with money to spend—and so on, and so on. Right now, in America at least, this vicious cycle has ended. But we are treading water now. And further spending cuts are in danger of restarting the vicious cycle (the current jobs report would have been a lot better if~30k gov. employees weren’t laid off, for example). Properly targeted deficit spending can start a virtuous cycle, and the goal should be to do just enough to achieve “exit velocity” from the hole we are in and then immediately start to cut back. (Achieving a growing economy would also result in more tax revenue to offset the spending.)

If we don’t, it looks like we are at minimum going to have a lost decade like Japan did. Which would be terrible for a lot of people.

flutherother's avatar

@Qingu Interesting link, but the UK is listed as the third largest creditor and yet it is hugely in debt overall. To me it is smoke and mirrors.

Qingu's avatar

Nations can be in debt while still holding other nations’ debt. It’s not smoke and mirrors. “Debt” is not monolithic, either.

cockswain's avatar

I just read an editorial in that liberal smut rag, The New York Times. It suggests we should end the debt limit entirely, as it is too dangerous a thing to toy with for political gain. While I did find the debt ceiling “crisis” useful in that is raised lots of awareness about the issue and may bring about significant tax reform and eliminate some wasteful spending, I do agree that it makes more sense to just borrow when we need to without this supposed Congressional “oversight.”

The editorial says it best here:
It’s an illusion of a law, instituted in World War I, to persuade gullible taxpayers that Congress is exercising responsible oversight over borrowing. Congress already controls spending and taxation, and if it wants a smaller debt it can cut spending or raise taxes at will. To allow the deficit to rise, and then refuse to pay for it months later, is the definition of financial irresponsibility.

I realize I’ve teed myself up for someone to point out Congress hasn’t done squat about the debt for a long time, but in theory that is how it should work.

Jaxk's avatar

@cockswain

Yes, in theory that’s how it should work. Congress has unfortunately shown it self to be very irresponsible. And spending bills passed are left to future generations to pay for. If there was a balanced budget we would not have this problem. Whether an amendment is the answer or not is open to debate. Congress passed Pay-Go to resolve this issue but it turned out to be impotent. They merely pass spending bills as emergency so they won’t have to comply.

It serves as a check on our finances just like your own credit card. If you reach the limit, you can apply for an increase (if you credit is good as ours is) or you can choose to curtail some of you charging. It only becomes a problem when you stop looking at it as a check on the debt. When you routinely raise the limit without thought (as we have been doing).

cockswain's avatar

Well, maybe we’re unreasonable in wishing for our leaders to act responsibly when it is against their own political self-interest.

I really think the time to address the debt is when times are good. But who wants to be the responsible parent at a fun party.

incendiary_dan's avatar

What we should do is start figuring out how to grow our own food and such. Whatever the market conditions, we gotta eat.

Qingu's avatar

The debt limit bullshit the Republicans pulled just caused S&P to downgrade our debt for the first time in history.

S.& P. officials said previously that the changing timetables reflected the belief that if the current political atmosphere in Washington was so toxic that lawmakers could not reach a deal, they were unlikely to do so in the future.

What’s changed is the political gridlock,” said David Beers, S.& P.’s global head of sovereign ratings, in an e-mail several days before a debt ceiling agreement was announced.

source

Unfuckingbelievable. We should throw them all into a volcano.

cockswain's avatar

Holy crap, this really is bad. The repercussions of this are greater than many of them likely even understand.

Jaxk's avatar

I think it’s appropriate to post the rest of the quote from David Beers:

“Even now, it’s an open question as to whether or when Congress and the administration can agree on fiscal measures that will stabilize the upward trajectory of the U.S. government debt burden.”

It’s the mounting debt that has us in this predicament. For those that think another stimulus is the answer, that ship has sailed.

RealEyesRealizeRealLies's avatar

@Qingu Yes, money is supposed to represent value. But our current fiat system represents the value of some bankers mind. It is created with the wave of a magic wand. There is no gold reserve that grows and shrinks to determine a common value to all people. That is bullshit. That is a lie.

Money is Fiction

Qingu's avatar

@Jaxk, if the Bush tax cuts disappear, our debt goes away.

End of story.

The reason S&P downgraded us is partly because it estimates that the Bush tax cuts will not disappear because of Republican intransigence:

_“Compared with previous projections, our revised base case scenario now
assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012,
remain in place. We have changed our assumption on this because the majority
of Republicans in Congress continue to resist any measure that would raise
revenues, a position we believe Congress reinforced by passing the act.“_

It is pointless, trivial, and completely unhelpful to just say “debt is our problem.” It’s like telling a cancer victim “I think the problem is cancer” rather than actually explaining how the cancer has spread and how to deal with it. I know I renounced engaging with you, but I’m not going to let you hijack this discussion with more of your bullshit.

Jaxk's avatar

@Qingu

You need to read the whole thing. Their assessment is that if we expire the tax cuts for the wealthy or enact other cost saving measures our credit rating may stabilize at AA+. That is the downgraded number.

“the lapsing of the 2001 and 2003 tax
cuts for high earners—lead to fiscal consolidation measures beyond the
minimum mandated, and we believe they are likely to slow the deterioration of
the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’”

You can play all the games you like but our debt is too high. You won’t get another round of stimulus spending. And if tax hikes slow the economy even more, the rating will decline.

Qingu's avatar

I read the whole thing, Jaxk.

And what in God’s name are you even saying, Jaxk? Tax hikes are unacceptable because they slow the economy but spending cuts which slow the economy even more are fine?

I don’t think you’ve ever actually known what you’re saying, and it’s terrifying that people like you exist.

Jaxk's avatar

@Qingu

I can’t believe that even after we’ve been downgraded, you still scream for more spending. The stimulus spending is over. It’s time to take this seriously and stabilize the economy. Massive spending, massive legislation, massive taxes, and massive regulation won’t do it. Ideology needs to be set aside and business needs to be encouraged, lest we all suffer even more. I only hope this administration heeds the warning.

Response moderated (Unhelpful)
ETpro's avatar

We should, but roadblock Republicans wouldn’t hear oif it. They want the economy to go to hell and they they want to blame it all on Obama and get themselves back in charge.

Qingu's avatar

The economy is not stable at 10% unemployment. That kind of stability is called a “depression.”

But of course, @Jaxk, you aren’t being intellectually honest here. Because in many other threads you claimed that tax cuts can increase revenue by stimulating economic growth. So you obviously understand the basic mechanics involved: spending now stimulates growth, which then increases revenues, which then reduces our deficit… and unlike tax cuts you can easily stop spending when the economy recovers.

Nothing in the S&P’s statement was against immediate spending to reduce unemployment. Because if you have even a basic understanding of macroeconomics you would know that having high unemployment and a long-term recession is an even greater burden on the deficit than short-term spending. The S&P’s statement was explicitly about political intransigence in Washington, and it explicitly said it was based on the assumpetion that Bush tax cuts would not expire. You are, as usual, simply being dishonest.

RealEyesRealizeRealLies's avatar

The immediate effects of raising the debt ceiling miracle pill…

Markets down worldwide.

US loses AAA Credit Rating first time in history.
Interest rates will now skyrocket for the common man on the street. This is in addition to the rate increase two years ago when my CC shot from 8% to 25% overnight for no reason whatsoever. Never late on a payment and they practically triple my interest. What now that they raise even further? The average price of buying a home will raise $19,000. in interest.

We just push the issue back further, creating an even larger problem than we currently enjoy. “Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising US public debt burden in a manner consistent with a ‘AAA’ rating.

I thought raising the debt ceiling was suppose to instill hope and calm fears to reduce potential panic.

Again, the lie in all of this is that we suffer the predilections of someone’s mind. It’s all in our minds… there is nothing substantial to base this crisis upon.

Fear is of the mind. Value is of the mind. Confidence is of the mind. We base our “worth” upon determinations from those who trick us into borrowing ghosts, and then charge additional ghosts for the privilege of doing so. It’s all a fucked up mind game.

Our weapon to overcome this lie is found within the truth of reason. The truth of reason is also of the mind, but it is different because it is not subject to cause/effect brought about by fear and uncertainty. The truth of reason is based upon thought/affect, and it will engage a positive affect upon the local communities which employ it wisely.

Forget about the world markets. Concentrate on the grass roots efforts of lowering personal debt, trimming household budget, supporting local business within your community, supporting local education of youth (if not with money, then with time), mandate personal savings, encourage community projects such as neighborhood gardens, food co-ops, fuel co-ops, and vote for reduced legislative burdens upon the entrepreneur.

Let the talking heads have their circus. Elevate the local tribal mentality and set examples for the entire world to witness a better way. Go say hello to your neighbor and offer a neighborly hand.

Jaxk's avatar

@Qingu

I understand your frustration. You’ve jumped on the spending band wagon and it hasn’t worked. Of course even a cursory glance at history would have shown that it has never worked. You are so invested in this failing policy that you lash out at anyone and everyone. The reason unemployment is at 10% is because of the Obama policies. They don’t work. But you and the rest of the Democratic ideologues have no other ideas or plans so you simply say, “let’s do it again”. If you really want to see a delusional argument try this one:

“unlike tax cuts you can easily stop spending when the economy recovers.” There are no spending cuts in the Obama budget either now or in the future. Growing government is the result of all your spending ideas and shrinking government is a monumental task. Your dreamworld doesn’t pass the laugh test.

Just to be clear, the S&P downgrade was about ‘Too Much Debt’. The way to grow the economy is with incentives, not penalties. But your hatred of anyone better off than you, will never let you see that. The policies you champion have gotten us into this mess and the only thing you can do is call every one names. It saddens me to know that this is the best you can do.

Qingu's avatar

@Jaxk, you are in no position to tell anyone what works in economics. You do not know basic facts about economics. You do not know what a liquidity trap is. You claimed that there is no consumer demand bust in the current recession. You have done nothing except repeat conservative mantras on Fluther.

And now you’re saying that the S&P downgrade, which they spelled out the reasons for, was not about what they said it was about. It was just about “too much debt in general,” nothing more, no further reasons to do with political gridlock? You read it—so that means you’re not just mistaken, you’re actively lying.

At this point I want to know who you are. There are other conservatives on Fluther but when faced with counterpoints they don’t simply ignore them, repeat mantras, or dishonestly cite irrelevant sources (or sources that don’t support their claims, as you have done). I am beginning to suspect that you are actually some sort of political operative. Normal people aren’t this dishonest, even on the Internet.

Qingu's avatar

For reference (quoting S&P):

The downgrade reflects our opinion that the fiscal consolidation plan
that Congress and the Administration recently agreed to falls short of
what, in our view, would be necessary to stabilize the government’s
medium-term debt dynamics.
More broadly, the downgrade reflects our view that the effectiveness,
stability, and predictability of American policymaking and political
institutions have weakened at a time of ongoing fiscal and economic
challenges to a degree more than we envisioned when we assigned a
negative outlook to the rating on April 18, 2011.
Since then, we have changed our view of the difficulties in bridging the
gulf between the political parties over fiscal policy, which makes us
pessimistic about the capacity of Congress and the Administration to be
able to leverage their agreement this week into a broader fiscal
consolidation plan that stabilizes the government’s debt dynamics any
time soon.

So Jaxk, were you lying when you said you read it? Or were you lying when you said the downgrade was simply about debt and not about political intransigence?

Qingu's avatar

One more point:

“But your hatred of anyone better off than you, will never let you see that.”

I don’t actually know anyone who is better off than me. There are people who make more money than me, but I’m not poor; I have never been unemployed, and I have basically everything that I want out of life. I am the luckiest person I know. Not so much for some people very close to me who are affected by this recession, but even they have it better than a lot (if not most) Americans.

I don’t hate rich people. I hate the subset of rich people who are unempathetic psychopaths. I hate rich people who bitch about our deficit while advocating blackmail and threatening economic collapse so that they do not have to pay more taxes to deal with our deficit. I hate rich people who confuse their good fortune to fall into an unoccupied business niche and extract massive profits from it with a divine genius that is rightfully rewarded by God’s invisible hand. I hate rich people who expect poor people to pull themselves up by their own bootstraps.

cockswain's avatar

@qingu You said if the Bush tax cuts go away, the debt problem is solved. Maybe that assertion was buried in a link and I missed it. Where is the evidence of that? I’m not attacking you, I want to know.

These discussions really deteriorate when we can’t even agree on that facts. Or even agree on their probabilities of being true.

Further, I share your sentiments about the psychopathic rich.

Qingu's avatar

@cockswain, this isn’t the chart I was thinking of when I said that, but it’s basically the same thing:

http://tpmdc.talkingpointsmemo.com/2011/06/chart-of-the-day-if-congress-does-nothing-the-deficit-will-disappear.php

It’s not just ending Bush tax cuts but it would go a huge way.

cockswain's avatar

@Jaxk I’d like to be clear on your position: what percent of the S&P downgrade do you attribute to the existence of the debt, and what percent do you blame the hostile political environment?

I hope you guys read the link in the details section. I posted that before the S&P downgrade. He calls the debt in this economy a non-issue. George Will called the downgrade minor. The White House is scalding S&P for their actions, saying they are crafting the argument to fit the conclusion. To me, S&P lost some serious credibility in 2008 by rating mortgage backed securities as AAA.

I enjoy discussing these things, and am trying to find the best approximation of the truth. Gladly I’m able to not draw the ire of either of you in the process. I respect both of your abilities to discuss these issues, whether I’m in agreement or not.

Just another random thought if anyone cares to discuss it: S&P clearly has significant power. They know the worldwide ripple effects of their actions. Maybe I’m paranoid, but do you think some political strings were pulled at S&P to cause this downgrade? Possibly to intentionally harm the economy for the gain of certain interested parties? Clearly a conspiratorial thought, but it entered my mind.

Jaxk's avatar

@Qingu

I’m going to try one more time to talk with you as if you were a rational person. I don’t hold much hope for this.

Both S&P and Moody’s have told us that they needed to see a reduction in the growth of our debt. They don’t care how we do it, they only want to see a plan that will bend the debt curve down by about $4 trillion over 10 years. The baseline debt curve is based on existing law. Existing law includes the expiration of all the Bush Tax Cuts in 2013. Neither party is proposing that happen. Democrats want all but the highest bracket to remain and Republicans want them all to remain. The difference is about $900 billion over 10 years. In either case the debt curve increases from the baseline. The credit agencies know this and are incorporating that into thier projections.

The Democrats want to increase taxes and feel there will be no impact on growth if they do so. Republicans don’t want tax increases and feel they will slow down the economy even more than it is. We have a fundamental difference in our approach to solving this problem. Whether you look at Republican plans or Democratic ideas, neither will actually reduce the the spending. They only reduce the growth of spending. All this talk of draconian budget cuts doesn’t exist in either plan nor are the credit agencies asking for them. The only plan I’ve heard that would actually reduce spending at all, is the ‘Penny Plan’ and I doubt that will gain any traction. I wouldn’t support it even if it did gain traction.

Democrats won’t agree to any plan that leaves the Bush tax cuts in place and Republicans won’t agree to any plan that removes them. That is the stalemate. Those are the intractable positions that S&P sees which make any resolution of the debt problem unlikely. So they have said that the current plan doesn’t go far enough and that it is unlikely that we will be able to create a plan that will.

And before you come back with some off-he-wall argument, the current agreement that doesn’t have tax cuts was acceptable to the Democrats because the sunsetting of the Bush tax cuts are still on the table. An agreement that addressed taxes without sunsetting the cuts would not be acceptable. That’s why Obama raised his requirement on the original Boehner agreement when he found out the $800 billion could be done without rate hikes. That was unacceptable.

Jaxk's avatar

@cockswain

I think I addressed your question above but let me clarify in case It wasn’t clear. The problem was the Debt. They warned us but we didn’t act. The very public argument and name calling made it obvious that we were not going to get agreement on way forward. If the debate had been more civil, we may have gotten away with the $2.1 (or $2.4 depending on who you believe) trillion in cuts. Since it became obvious that we were not in agreement and would never come to an agreement, the $2.1 would never solve the problem.

If the debate had been more civil, S&P would likely have given us more time. If it looked like an agreement was possible they would have had an excuse to delay their downgrade. I disagree that the issue was to penalize the US. I think they backed themselves into a corner by demanding $4 trillion. When they couldn’t get it, they had to follow through to save face. What is really disappointing here is that the rhetoric has not softened but actually gotten worse. We’ve gotten a slap in the face but instead of heeding the warning, we’ve escalated the temperature of the debate. Once again, instead of fixing the problem, we are hell bent on fixing the blame. And no matter how you look at the heated rhetoric, the basic problem is the debt curve. S&P wouldn’t care how much we argued if the debt curve was bending down.

cockswain's avatar

And no matter how you look at the heated rhetoric, the basic problem is the debt curve. S&P wouldn’t care how much we argued if the debt curve was bending down

Well said. I’d imagine we’d all agree that creating jobs is the most important thing. Do that, and you increase GDP, which reduces the debt/economy ratio. The debt ceiling debate does nothing to help that. Certainly the spending cuts do not. Actually, do you agree with that? The spending cuts will actually raise unemployment, right? While that is a way to reduce the growth rate of the deficit, it certainly does nothing to promote job growth. Unless you believe that somehow this is going to indirectly stabilize the economy.

This economic instability and uncertainty are significant factors in job growth. The debt ceiling drama harmed that. Uncertainty about what this new super committee will do for further cuts and tax reform are not helping increase confidence in businesses to invest.

I really, really wish the GOP would have compromised on expiring Bush tax cuts for the very wealthy. I think, in light of the rationale behind the S&P downgrade, the GOP were giant assholes in that regard. Most people agree the GOP came out ahead in the “deal.” Meaning there was plenty of room for compromise. So what if they piss off some of their Tea Party base? You think the Dems haven’t pissed off their base way more? @Qingu isn’t completely unreasonable in his anger towards the GOP for taking the economy hostage. I get that you are conservative in your philosophy, but surely you can see your party is capable of foolishness. Note I’m not saying the Dems aren’t, so you don’t have to turn this into an argument about who the biggest fuck ups are.

Jaxk's avatar

@cockswain

I would agree that creating jobs is the most important thing we can do. I suspect we will disagree on how to do that. First I believe that the mounting debt does have a chilling effect on the economy. The mounting debt has created a loss of confidence in the US economy (I think the S&P downgrade would support that). Some intelligent spending can help to create growth but simply adding to government payrolls creates more debt than growth. We have increased government spending by 30% and economic growth is down around 1%. It’s hard to reconcile those numbers and say the spending has had a beneficial effect.

The key to creating economic growth is through the private sector. Growth in the private sector will not only create jobs but increase government revenues while reducing debt. Growth in government creates jobs but they are all adding to the debt. The other piece of this puzzle is to get consumers and businesses to invest thier own money in growth rather than government money. Tax cuts are a good way to do that but we don’t have any financial room to do it. Lowering taxes would generate some growth but the resulting debt would slow growth. The result of those two opposing forces would leave us right where we are. Basically the same problem we have with the spending.

The Fed has gone as far as they can with monetary policy and our options are limited. That doesn’t mean that we have no options, however. Things like repatriating the $1—$3 Trillion that are being kept overseas, would inject a lot of money into our economy. I know Democrats have an ideological problem with this but I don’t care whether they use that money to invest or pay out dividends, as long as they do it here instead of overseas. We need ways to get consumer and businesses to invest some of the money they are keeping on the sidelines. That will go a lot further to creating growth than any amount of government spending.

I talk a lot about stability. There is a lot of money sitting on the sidelines simply because no one is sure what will come next. Will they need that money to pay increased taxes or will they need it for the next round of regulation. No one is sure what is next so they’re taking a wait and see approach. Consumer savings have increased as well. Even the average guy with a job isn’t spending but rather saving it for the future. Many businesses are struggling but there are many that are doing quite well. Those that have money need to be encouraged to spend it and those that are struggling need to have a way to borrow or bridge the gap. We can make that happen without spending money to do it. We just need to be a little creative in our approach and we need to let our long term vision of a different country go, in favor of a short term economic growth model.

One last point. I don’t hold either party harmless in this latest debacle. Boehner made an incredibly stupid mistake when he walked out of the negotiations about the change in tax rates. I understand his frustration and actually agree with his point but walking out was not a good move. Obama compounded that mistake with an incredibly stupid mistake of his own. Taking the whole debate public with all the name calling, only drove a wedge further into the negotiations and brought the credit rating problem, to a head.

cockswain's avatar

Really what you’re saying seems pretty sober economic thinking. I’m not going to argue the 30% spending to 1% growth since I could debate that number to maybe 20% to 2% and not really make a great point.

What are you talking about with repatriating a few $T? I’m not sure if you mean overseas tax shelters or investment in foreign labor/manufacturing or what. How is it to be repatriated, and why would Dems object?

I completely agree about stability. Even if taxes are raised and regulations increased, at least if businesses knew what they were they could plan. They don’t know what to set aside, so are being wisely cautious. They just need to know what the next few years will look like so they can decide what to do.

You mention the idea of coming up with intelligent and creative solutions to spend our resources more wisely to solve the economic crisis. Maybe I’m premature in using the word crisis, but the future currently looks grim to me. These creative and intelligent ideas are really the crux though. Beyond repatriating the overseas money, what other ideas do you have?

As another random aside, the fact that heavy consumption is so vital to the world’s economic growth is a problem. The status quo is truly an unsustainable practice from an environmental standpoint. Saving money has historically been a wise thing to do, yet harms the economy. So how do we sustain such a large world population with jobs while slowing our consumption of the resources? This “green” jobs concept is no joke. There needs to be strong job growth in providing sustainable products produced with sustainable methods.

Jaxk's avatar

@cockswain

International corporations earn profits overseas which they pay taxes on overseas. If they then return that money to the corporate headquarters here in the states they pay additional taxes here. So rather than bring the money home, they leave it in foriegn banks and use it for expansion in their overseas business. Many would like to bring it home but the tax penalty is just too great to make it worth their while. As long as it never returns to the US we have no control or ability to tax it. A tax rate of say 5% would bring that money (at least most of it) back into the US, generating both tax revenue and stimulative spending. A quick article about this is here. The total amount is estimated between $1 -$3 trillion (depends on who is doing the estimate).

I’ve presented a number of ideas over the past month that would create expendable income yet not cost the government any money. In most cases would generate additional tax revenue as well. Opening up our own drilling for oil is an obvious one. I know environmentalists are against it but we are encouraging others to do the drilling and sending our resources overseas to feed their economies instead of ours. We’re talking about millions of jobs over the next few years and substantial new revenues for the government. Not to mention the injection of money into our economy and more expendable income for everyone as the price of gasoline declines.

We currently have interest rates in the 4% range for home loans. Normally when interest rates decline there is a flood of refinancing. We haven’t seen that because too many are underwater on their home loans. No equity, no refinance. If the government brought pressure to bear on the banks to refinance existing mortgages at the prevailing rate, we could add an incredible amount of expendable income to those homeowners. If you’ve been making payments at the higher rates, your likely to make the payments at the lower rate so I see little risk. The banks would still be able to charge their refinance charges so they don’t really lose anything. And the lower interest payments reduce the interest deduction on your home so tax revenue actually increases. No cost to the government.

Another idea I’ve been toying with, is to allow people to use their 401K to buy a house. No penalty and no tax on that withdrawal. Whether you believe the housing market is a good investment right now or not, it is certainly as safe as the stock market which is where most 401’s are invested. It would provide the down payment for a home which currently is a major stumbling block to middle America in buying a house and would have no immediate cost. Some degradation of future tax revenues might be realized but I don’t think it would be significant. And it would provide a significant injection of cash into the industry most affect by the recession, the housing industry.

Of course a reduction in regulation would be a great boon as well since no regulation is free. That’s not to say don’t regulate anyone but rather just do the cost analysis that should be done anyway and if it can wait, then wait.

You may not agree with me on some or all of these proposals, but that is what I am referring to when I say no cost but getting the private markets to invest rather than the government. I think there is significant opportunity for injection of cash while controlling spending and increasing revenues. You may disagree or see other opportunities. I think the future could still be bright, but we need to tap our collective intelligence to make it so.

Qingu's avatar

@Jaxk, I actually don’t disagree with your assessment. I also agree that tax hikes can be a drain on growth, even tax hikes on the rich. (This is why I am not sanguine about tax hikes right now; the economy is too fragile to risk, even if we have to go more into debt because of low revenues).

But the same exact thing can be said for spending cuts. (Most) spending cuts are also a drain on the economy for the exact same reason that tax hikes are. They take money out of the economy. Look at the latest job report. Private sector actually had great growth, but the public sector shed ~40k jobs. So overall we had mediocre growth. Those 40k public employees now have less income to tax and less income to pump back into our economy.

So I hope we can agree on the basic problem: we cannot pay down our debt without spending cuts and tax hikes. But spending cuts and tax hikes will drain growth—which we also need to pay down our debt in the long term.

Now, we can disagree about the proportion of spending cuts vs. tax hikes that would make the best ratio of growth vs. paying down our debt, and when these fiscal policy changes should take place. It’s entirely fair to expect the House Republicans to shift the ratio towards more spending cuts. (For the record, I am fine with spending cuts if they are in the future and don’t threaten growth, and I am in no rush to hike taxes on the cusp of a double-dip recession.)

But this is where the S&P comes in: we haven’t simply been disagreeing. The Republicans have been demanding, by holding a gun to the head of our economy and threatening the possibility of default. A normal, functional political system should be able to negotiate in good faith some mix of cuts and tax hikes to deal with our deficit problem. This is not happening. And it’s not a problem with the Democrats.

Jaxk's avatar

@Qingu

I understand your point about spending cuts and appreciate the fact that you see the point about tax hikes as well. If we try to be fair about the demands from both sides, I see quite a different picture than you do.

The current deal doesn’t really cut anything next year. The growth of spending is only cut by about $28 billion but the spending is still higher next year and every year thereafter. There really are no cuts. What the democrats demand are tax hikes but they want them implemented in 2013. So the result is near term we increase taxes and some time after 2015 we see a reduction in the growth of spending. 70% of the spending reduction is after 2015.

The deal they had with Obama to increase revenues by $800 billion and decrease spending by by the same $1.2 trillion we had in the final deal and another $650 billion in entitlements, was probably the best deal we would get for either side. And that deal also made no cuts but only reduced the growth of spending in the out years (beyond 2015). Obama screwed up by demanding more tax, Beohner screwed up by walking away, and Obama screwed up again by taking his complaint to the press in an obvious political move to shift blame. I’m just not sure how you hold Obama blameless in this fiasco. And through all of this, there have never been any real cuts. Only future growth reductions.

Qingu's avatar

@Jaxk, before I respond, I just want to clarify:

Are we both in agreement that any spending cuts or tax hikes should be extremely limited until the economy recovers significantly?

Jaxk's avatar

@Qingu

Sure. I’d agree with that.

Jaxk's avatar

@Qingu

I suppose, I should add that I don’t consider ‘Limited Growth’ a cut.

Qingu's avatar

Well, since spending is tied to the health of the economy, limited growth is hard to avoid at this point. You obviously simply can’t cap expenditures. You can turn the temperature down on your heater, but if the weather keeps on getting colder you will ultimately be forced to spend more money on your bill.

But we’re in basic agreement, which is weird.

But okay. I mean, you want no taxes, I don’t want spending cuts, but we both agree that this issue needs to be deferred until the economy recovers and negotiate something. But the Tea Party was demanding cuts now and threatening default to get them. Default is the risk that the S&P is evaluating. By actively threatening default, the Tea Party increased that risk from “zero” to “nonzero,” which is reflected in our downgrade from “riskless” to “not quite riskless.”

The blame rests with the party that pulled out the gun.

cockswain's avatar

This is some sort of miracle.

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