Because increases due to unemployment are part of the automatic stablisers which are not disputed by either side and not part of the debate about expansionary vs. consolidation policy in a recession.
I think Krugman took De Rugy to be arguing that Europe did not engage in austerity in the sense used in the U.S. political debate. Meanwhile, De Rugy was arguing that while moderate austerity seems to have failed, Real Austerity would succeed.
As for De Rugy’s point, I’m not sure there are lot of areas of economics in which the marginal change harms things but going even further along that same spectrum eventually helps. And, in any event, as **IClaudius **points out, the debate over realistic possibilities involved marginal changes in one direction or the other.
I don’t recall him saying anything about bank bailouts, but I’m pretty sure he considers welfare/unemployment payments as stimulative. He certainly has been against ending unemployment extensions in the US. By themselves though, they are not enough.
Some of the European austerity has been in increasing taxes, so I trust not all Republicans are on board with reproducing what Europe is doing.
Here is the link to the Krugman column. I don’t see any indication of what you said - can you give a cite?
Krugman notes that the IMF was less in favor of austerity than other players. I don’t think you can blame them - the ECB and the political leaders are more at fault. But I suppose they could have done better in trying to reduce the level of austerity.
Understood. But to the extent that you want to have austerity in the face of increasing welfare payments and bank bailouts you would have to cut something else somewhere.
Just because there are good reasons to not cut these payments that doesn’t mean that they don’t offset austerity. Bottom line is that if government spending is staying about level, you can’t claim that this proves that cutting spending is harmful. It sounds like Krugman is trying to do this by taking these payments off the table and then looking at the rest in isolation.
It’s linked in Richard Parker’s post (#17).
nm already addressed
I also have two questions that don’t merit their own thread, but maybe someone here can answer:
Is it true that, right now, if the U.S. borrows $1 in 2013 dollars, it will have to pay that debt back in the future with less than $1 in 2013 dollars because we have an effectively negative interest rate?
If that’s so, shouldn’t everyone agree that the thing to do is, at least temporarily, replace tax revenue with borrowing?
She isn’t advocating “going even further along that same spectrum”. That would mean more spending cuts AND more taxes. In her own words
So what happens when interest rates rise after we have accumulated all of this debt?
I don’t understand this idea. If the government stops taxing people today they are going to have to tax them that much more in the future to make up for it. Even if it’s true that it will slightly less in real terms than it is now, it’s still going to be a lot for the people to bear. For example, suppose th government takes 20% of GDP now, if it borrows all that amount today it will have to take 40% when it comes time to pay back.
This is besides for the fact that borrowing that much money will itself increase the interest rate.
Cutting spending and cutting taxes is an odd definition of austerity in this context.
We go back to the same balance of taxes and borrowing we had the last time rates were at that level, and continue to try to fix our long-term fiscal picture, I assume.
Let’s say the Treasury owes ten dollars to Sally for Social Security. The Treasury can either take ten dollars from Tim and give it to Sally, or it can borrow ten dollars from Bob and give it to Sally. If it borrows ten dollars from Bob, it will have to pay Bob back nine dollars two years from now. At that point it will have to tax Tim nine dollars.
Now, obviously, Bob is getting the short end of this stick. But are we really weeping for the poor suckers still buying government debt at negative rates? No, obviously we’re not. They do it because of the security, among other reasons.
I don’t think that’s obviously true, but even if it were, so what? So we borrow marginally more and the interest rates goes back up. Then we ratchet back to the previous level of borrowing.
Looking at that, I’m not sure it addressed your objection, which seems to be that Tim will not only have to bear the $9 but also whatever other taxes he would have had.
If we were literally to eliminate all taxes and then tax everyone nearly double the next year, you can imagine that this might cause some problems notwithstanding the fact that, if everyone were perfectly rational, it should cause no problems at all.
But if we’re talking about a 35% rate in 2013 and a 38% rate in 2014 instead of 37% both years, I don’t see the obvious problem.
Call it what you want but what is not working in Europe is precisely what Obama and the Democrats are promoting as the “balanced approach”.
And paying mountainous amounts to service the debt, right?
No. What Obama and the Democrats are promoting as the “balanced approach” is an approach to long-term budgets, not short-term ones. In the short-term, Obama wants more stimulus and to extend tax cuts for pretty much everyone. He only got the second of those.
Only if the change in interest rates was permanent. If the marginal replacement of debt with taxes once rates rise reduces the interest rate back to what it otherwise would have been, then I don’t see the harm.
But is the effect on interest rates essentially what the question comes down to?
It follows from the laws of supply and demand.
It doesn’t work like that. It’s not like the interest rates are fixed at some level such that you can get in any amount of borrowing at current levels and change your policy if it subsequently changes.
Interest rates on treasuries are determined on a daily basis based on trade in those securities, but the rate the government pays is based on the results of auctions. Obviously the more the government is auctioning off, the less the government will get for its bonds, i.e. a higher interest rate.
In sum, interests change a lot faster than government policy.
ISTM to have the same problem, but just on a smaller scale.
Indeed, but not so inexorably as we once thought. If that were so, rates would already be a lot higher.
It is true that the interest rates can change by the day (or at least by the auction), while tax rates tend to be set for longer periods. But I don’t see why that’s fatal. It just requires that whatever mechanism would adjust the tax rates would be pegged to the bond rate. We don’t have to use income taxes, after all. Heck, we could eliminate National Park fees for that day, or whatever.
Why? People cannot be trusted to deal rationally with being told that this year they get to keep 10 dollars while next year they’ll have to pay 9 extra?
It seems to me that you need some behavioral economics rationale to explain that.
Not so. Right now there’s a lot of supply but also a lot of demand. (Some of this has to do with distortions by the Fed, some because of general economic conditions, some possibly due to Chinese monetary strategies, whatever.)
If the only thing you changed was the supply rates would have to go up.
I don’t think this is practical.
No, they can’t. Witness people’s behaviour as regards to credit card debt, mortgage balloon payments etc.
You do, and here it is: people are shortsighted and foolish.
Assuming a half-dozen other things are true, like the demand is sufficiently elastic. But if the reason rates are so low now despite all the borrowing is that treasuries are seen as the only safe refuge for cash, then it isn’t inevitable that rates are going to rise from more borrowing. Is it?
Maybe. I haven’t really thought it through, obviously.
Another thought: why can’t the borrowing precede the tax change? So we borrow an extra $50 billion a month until the bond rates start to rise. Once they rise to positive rates, we stop. (And at that point the Fed could buy back some portion of the bonds, if there were some adverse consequences, of course.) Based on whatever “free” debt we were able to accumulate in that period, we reduce next year’s income taxes by that amount, and announce that the next four years after that will have some very slight marginal increase.
That would solve the problem of trying to coordinate the tax change with the rates, I should think. And it moderates the consequences of irrational behavior because the scheme will be very clear for planning purposes, and the change will be quite slight. And while there might be some downside because of irrational behavior, is it obvious that it would outweigh the upside?
I, for one, would be happy to keep 10 dollars today and pay 9 next year.
There’s an element of truth to that but you’re ignoring the fact that the Administration’s official policy includes expansionary policies like the proposed Jobs Act, and through their negotiations to extend benefits and renew the Bush tax cuts they never advocated the expiry of all the cuts - only the upper incomes which are least stimulative in terms of consumption demand.
It’s a pretty simple dichotomy: the Democrats favour expansionary fiscal and monetary policy with the unemployment rate above 6% and an output gap from below trend growth. Support for consolidating fiscal policies (including cuts & tax increases) are either directed at medium or long term balance, or they are part of the horse-trading with Republicans in Congress. In contrast, the Republicans tend to support hard money and more immediate fiscal consolidation through spending cuts only.
That’s very different to austerity now, now, now - so we can have confidence and growth.
Supply and demand still applies. There is not an infinite demand for things that are the only safe refuge for cash. (Plus, the more you borrow, the less you will be seen as the only safe refuge for cash.)
My guess is that you would save a relatively small amount of money before the rates crossed the line. I believe the spread on mid-term rates is not that large. (10 year treasuries have been about 1.80% - 1.90% recently.)