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wundayatta's avatar

Are drastic cuts in government spending the right way to reduce debt in Europe? What about America?

Asked by wundayatta (58357 points ) October 12th, 2012

Paul Krugman writes in the New York Times that strong fiscal austerity is the wrong thing to do at this time. Yet that is the solution that Romney/Ryan would have us institute. The IMF says it’s a failure in Europe.

What do you think?

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10 Answers

DrBill's avatar

Budget cuts will help, but it is also important to consider where to cut, and where to leave it alone. I am all for cutting politian’s pay.

jerv's avatar

It depends on which things you cut. If you cut those things with huge costs and little/no benefit, yes. If you cut things that cost less than the benefits, or actually cause harm (as Republicans seem to want to do lately) then no.

Either way, repeating somebody else’s mistakes and expecting great results is fucking insanity.

flutherother's avatar

Cutting spending contracts the economy and reduces tax income needed to pay off debt. Maintaining high spending increases the debt that taxes have to service. It is a dilemma. Either way leaves a mountain of debt that can’t be cleared. The all important credit ratings agencies want to see spending cuts or they will increase the interest on the loans which will make them even less affordable. I’m not sure I trust their analysis of the situation but they have the power.

Take Greece as an example; it has gone through 5 years of austerity resulting in a 25% rate of unemployment, reduced incomes for those in work and reduced pensions. The economy has contracted 25% in that time and is forecast to contract a further 10% over the next two years. Austerity has not worked and is leading to further austerity and there seems to be no end to it.

It is like watching a slow motion train wreck and no one has the answers.

ragingloli's avatar

It is not.
Germany went into the recession with stimulus programmes, and coupled with our social safety net kept our economy stable.
And now we are forcing Greece to do the opposite. The forced spending cuts will only make Greece’s situation worse.

wonderingwhy's avatar

Budget cuts are part of it but hardly the whole fix. Cuts need to be made in a way that emphasizes reduced fraud and waste and improved access and accountability. Every cut that results in direct job loss or a canceled contract is another group of unemployed persons, which means less people contributing to the economy beyond their now necessary government checks.

Government can be the lynchpin that off-sets slumps. When the private sector is doing well and creating it’s own demand and expansion, cut spending, hand-off to industry and keep the wheels greased, while raising taxes and paying down debt. When the economy is doing poorly government needs to take up the slack creating demand and hiring as needed to drive expansion, while keeping people at risk from collapsing afloat. Of course we could always leave it to its own devices, cut government spending until we’re paying off our debt and let the economy shrink until it balances itself, that will probably work too, but it’s going to be a lot more painful and leave a lot more people behind for a lot longer than is seemingly necessary.

CWOTUS's avatar

It’s an interesting question without an easy answer.

People tend not to think about “government debt” the way they think about “private debt”, namely, their own debt. Partly that’s because we tend to understand our own debt, as a rule. We know why we have it, whether it’s “good debt” spent on capital investments (and expenses) such as a home or a college education, that we even can pay down, or whether it’s “bad debt” spent on material items of little or no real import to our lives, but “because we want it”.

Usually when we see debt increasing (or income decreasing) in our own lives we attempt to take corrective actions if it’s possible, because few people want the shame and humiliation, much less the loss of lifestyle, that is often associated with bankruptcy and “being broke”. And in general we can see those things happening pretty clearly, so we usually know what steps have to be taken, whether decreasing unnecessary expenses quickly, taking on a second job, having more family members work outside the home, etc.

Government debt, besides being harder to get a handle on, is also highly politicized. And even though many in government don’t even know how much the total debt is or where it originates very well, or control it in any meaningful way, it’s also very unusual for governments to actually default on payments to the point where reasonable and honest judges of credit would say, “You’re busted and broke.” Part of the reason for that is that, aside from the personal pain and humiliation that government leaders would feel from such an event, the effect on “the world financial system” is also catastrophic. So “reasonable and honest” judges of credit are not invited to assess the credit-worthiness of specific governments.

For this reason many who are very scrupulous with their own finances will give “government” a lot more leeway in the handling of its own finance. This also has to do with what the government seems to be doing with the money, with “our” money. To the extent that money is being spent on social programs that seem to “benefit everyone” (regardless of efficacy of programs in general, or strict accountability of every dollar spent), then people who vote that way will tend to overlook “excessive” spending in those programs as being “better than the alternative”. Likewise, people who favor “strong national defense” (or who work for defense contractors or supply products to them), will overlook a lot of dirty laundry in that pile, too.

When, on top of the politicization of the debts that we build up through government, we hide some debts due to accounting tricks and complex rules that most people simply don’t even pay attention to, much less understand, it’s easy for debt to grow (such as in federal and state pension plans and pension plan guarantees), in ways that the public only vaguely comprehends. This is on top of the fact that numbers in “billions” and “trillions” are barely understood even conceptually by most taxpayers and other citizens.

Finally, because most governments don’t want to see defaults by most other governments, debt becomes cross-linked among many countries and institutions. We don’t want any one country to go into default, because that risks all countries and most large banks suffering – and potentially defaulting – as a result. And when countries and banks default, it hurts all of us.

So we do what we can to avoid default, paper over problems and pretend that they don’t exist, inflate our way out of problems when we can (paying off old debts incurred with “real money” with currency that is worth less and less as time goes on) and continue to extend credit to governments in the hope that the problems du jour will go away. And sometimes they do.

To answer your question – finally – if debt is monitored, controlled and managed prudently and if reasonable and conservative economic projections about future growth and revenues can reassure lenders that this is so, then it is possible for governments to allow debt to fluctuate within pretty wide ranges (which would not be allowable to most private citizens without political influence or other “special considerations”). So it should not usually be necessary for government to make “drastic cuts” in most worthwhile programs.

But this hasn’t been happening much around the world lately. Economic slowdown has occurred, growth and revenue forecasts are suspect, so revenue is also problematic, and the debt continues to increase. That can go on indefinitely, but not forever. The question is, when does “indefinitely” turn into “no longer”? The closer we get to some nebulous “no longer” point, the more drastic must be the cuts in spending, because the money isn’t there any longer and creditors no longer believe that their loans will be paid off in any meaningful way.

janbb's avatar

Oh @Willow you’ve gotten so verbose since you changed your avatar.

ETpro's avatar

@wonderingwhy gives a simple to read but incredibly difficult to actually do answer. Through partisan politics into the effort to do it, and you get—well, you get what we now have—debt approaching 100% of gross domestic product and stagnant growth. You can’t rationally stop spending, that will trigger a deep recession. You can’t keep spending, That will eventually trigger a downgrade of the nation’s credit leading to higher borrowing costs and exacerbating the debt problem.

And while I agree with just about all of what @CWOTUS wrote, I don’t know what he means about ”...“reasonable and honest” judges of credit are not invited to assess the credit-worthiness of specific governments.” I would certainly call Moody’s Investor Services, Standard and Poor’s, and Fitch Group a bunch of amateurs, nor do I believe they hedge their numbers to hide ugly truths.

But the gist of what @CWOTUS says is true, and captures the problem. There are no easy answers and the hard answers aren’t going to be given till partisan gridlock is swept aside. In today’s politically venomous environment, that is unlikely to occur before a crisis of epic proportion looms. Right now, what Obama proposes will up growth somewhat but not deal with the mounting debt. While they should pay their fair share, and are not doing so now, there aren’t enough millionaires to tax to pay down the debt simply by bumping their rate 4% or even 40%. And what Romney is proposing, slashing financial regulations and instituting a 20% across the board tax cut, will explode the debt yet again and lead to a second great recession.

Still, if we don’t make adjustment to trim unnecessary spending and tax enough to fund that which is necessary, you can expect a crisis of epic proportions in the next 5 years.

dabbler's avatar

“Tax enough to fund that which is necessary,” That is at the crux of our current problem. Taxes were cut without cutting spending first. Where there is good reason to cut taxes
(indeed a mixed bag, lower incomes can use relief and every dollar they don’t pay in taxes will go into the economy as spending, top incomes don’t need any relief they are doing historically as well as ever and any money they don’t pay in taxes they don’t spend it is “invested” in hedge funds that extract wealth out of the economy.)
then the tax cuts should have been balanced by spending cuts BEFORE the cuts went into effect.
The Friedman/ChicagoSchool/trickle-down/cutGovtSpending approach has proven to be catastrophic every place it’s been applied and we should laugh those people onto the “freak show” shelf where they belong.
Keynes has been proven to be correct that in lean times government spending (on stuff of lasting value like infrastructure, not wars/bombs) is the right thing to use to stimulate the economy, along with moderate tax cuts. What has been missing to the extent that Keynes has been applied is that in prosperous times taxes should go up to pay off debt and government spending can go down to hand off growth to the private sector and keep inflation in check. So anyone who claims that Keynesian policies don’t work has not seem them in action recently.

wundayatta's avatar

Thank you all for giving me such thoughtful answers.

This discussion makes me think of how people use rhetoric strategically in politics. This discussion makes me believe in people of good will with different ideas coming together to have a serious discussion that is designed to help solve problems. We don’t have to get all radical and pedantic, if we…. what? Trust each other?

I know I get radical and pedantic at times, especially when I think someone else is doing the same, or lying, or very ignorant.

Perhaps the first thing problem solvers have to do is find a common understanding of the situation and of terminology. I’m not sure we can have useful conversations if we don’t do that first.

But then we can get down to real concerns: how much debt is too much; how can we solve the debt problems without creating even worse problems? Are there people we need to protect when we try to cut back on spending? Who are they? What if they are poor people and the public doesn’t like poor people? Thinks they’re lazy or something?

I’d like to hear a discussion of people concerns about making spending cuts, and know that the deficit hawks understand these concerns. Because as long as it seems like the hawks have no concern for those who will be hurt by these policies, I don’t see how any compromise can be reached. And it is clear to me that this is getting in the way of our ability to even agree on what the problem is. By that, I mean the significance of the problem. As @CWOTUS said, debt can be good and it can be bad and it can be very bad. If we don’t agree on the signficance of the problem, how will we get to work on it?

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