What's the reason austerity is needed again?

[luiz]

Except that we don't have a problem paying for it. So how do we justify screwing people out of what they worked for all their lives?

Not to mention, if we do screw the people out of it, the economy as a whole is going to take a serious hit.

You will have a problem paying for it. A 10 trillion dollar problem in the next decade alone.

That's not actually what happened in the US. In the US it was all about an organized effort to change the distribution of wealth in the nation. The rich wanted more. So they fought for the politics to give them more.

But that's not how it works. And for the record, the rich increased their share of national wealth in pretty much all advanced nations since the 80's.

Offering a theory that is entirely inconstant with the real world is worse than useless. Why don't you look for a theory that is consistent with the facts?

Savings started to collapse in the US with Reaganomics. That was contrary to the theories in vogue at the time. Rational Expectations said the opposite would happen. Supply Side economics said the opposite would happen.

So what is the theory of why savings declined? It's really very simple: People started spending as if their incomes were continuing to rise even though their incomes had ceased to rise. They did that by drawing down their savings and then going into debt. This is normal behavior. People are unwilling to live as if they are falling ever further behind others when they are working harder than ever before. Also, the private pension system has been looted and destroyed. And people just do not put away in private savings what pension plans used to put away for them.

However that only explains the low savings rate. It is irrelevant to the investment rate. Irrelevant, in that it means nothing in any way, shape, or form. We are drowning in capital. There is no such thing in the US as a business that cannot invest because there is not enough investment capital available in the nation, or that the costs of capital are too high.

So the lack of capital is not a problem. The lack of savings is a problem, but not a problem for business investment. It in no sense explains the lack of business investment. What explains the lack of investment is Wall St directing money out of the country instead of investing here. What explains lack of investment is the lack of consumer demand due to the fact that wages are far too low.

The ultimate foundation of all of America's economic problems is that labor is extremely underpaid. The United States economy does not have a problem that does not have as a foundation the fact that labor is underpaid by at least 1/3.

And because labor is so extremely underpaid, because companies are not investing, because Wall St has become rabidly anti-investment, because government no longer has the money to invest, that is why we have the budget problems.

Now austerity is an attempt at "solving" the problem by deliberately making the problem worse. The economy requires the opposite of austerity. The only thing austerity could conceivably accomplish is a smaller national economy. That's the only thing that it has ever accomplished.

Well your theory does not add up very well.
If savings are low, by definition you have a low available supply of domestic capital for investment. The free capital markets that you seem to dislike do remedy this situation to some extent, by supplying cheap foreign capital. But as Auerbach mentioned in the text I quoted, the correlation between domestic savings and investment level among nations still exits.

Now back to the policy decisions. You have a country where consumption kept growing fast (too fast during some periods), but savings and investment continues to fall. Clearly high consumption alone do not trigger investment. What do you do? Obviously, you create policies that reward investment. You complain that "Wall Street sends all the money abroad". Well, for starters, you don't have that much domestic money to be sent abroad to begin with, as your savings rate is and has been very low for quite some time. Additionally, Wall Street wants to make money, so they will invest where there is a good return. If you want investment in the US you create policies that reward investment, like taxing capital gains lightly.

And that's what I've been saying.

 

[Crezth]

Why should someone from Brazil know how an economy works? All Brazil has are coconuts.

 

[luiz]

Why should someone from Brazil know how an economy works? All Brazil has are coconuts.

Coconuts are a tough market. The coconut bulk dealers have anticipated the weather conditions of Rio's summer better than meteorologists more than one time.

 

[aelf]

Going bankrupt shouldn´t be a criminal offense. Nor do I think that outlawing or out-regulating depression is even remotely feasible.
That's not about any individual case, just a big picture.

No, no. I'm talking about the risky and unethical but not illegal behaviour that, you know, even the CEO of Goldman Sachs felt compelled to address recently; the kind of dishonest and greed-obsessed culture in the financial industry that people like Bob Diamond clearly tolerated if not encouraged.

I find it absolutely repulsive that that serpent has not actually been slayed when certain groups are preaching about austerity and wagging their fingers at the relative laziness of people who are not rich. That's why I'm asking: Whose fault is it really?

 

[Leoreth]

Coconuts are a tough market. The coconut bulk dealers have anticipated the weather conditions of Rio's summer better than meteorologists more than one time.

Why don't they work as metereologists then? I sense a market failure

 

[Cutlass]

You will have a problem paying for it. A 10 trillion dollar problem in the next decade alone.

So we need to abandon what the Republicans want and grow the economy.

But that's not how it works. And for the record, the rich increased their share of national wealth in pretty much all advanced nations since the 80's.

Except that that is what happened. The drive to concentrate wealth has slowed the creation of wealth.

Well your theory does not add up very well.
If savings are low, by definition you have a low available supply of domestic capital for investment. The free capital markets that you seem to dislike do remedy this situation to some extent, by supplying cheap foreign capital. But as Auerbach mentioned in the text I quoted, the correlation between domestic savings and investment level among nations still exits.

It is indisputable that the US was drowning in investable capital over the past decade. This is the reason capital was dirt cheap and bubbles formed in every part of the economy. Now given that we know with no dispute that there was more than enough capital to make any conceivable investment, and that those investments did not take place, then what's the problem?

The savings rate issue applies to a closed economy. The US is anything but.

Now back to the policy decisions. You have a country where consumption kept growing fast (too fast during some periods), but savings and investment continues to fall. Clearly high consumption alone do not trigger investment. What do you do? Obviously, you create policies that reward investment. You complain that "Wall Street sends all the money abroad". Well, for starters, you don't have that much domestic money to be sent abroad to begin with, as your savings rate is and has been very low for quite some time. Additionally, Wall Street wants to make money, so they will invest where there is a good return. If you want investment in the US you create policies that reward investment, like taxing capital gains lightly.

And that's what I've been saying.

And yet those policies have exactly the opposite outcome in the real world than your theories say they should have. Why do you think that is? By your theories, capital has not had it better in at least 60 years as it has in the past 10. And yet business investment has never been lower either. Your theory is producing opposite real world effects as you think that it should.

Increasing the return to capital has decreased investment. The real world is telling you, repeatedly, that there is something wrong with your theory. So how do you respond to that? "Well we have to do a lot more of that failed spectacularly every time we did it in the past." Not only has increasing the return to capital never resulted in increasing investment in the US in the past, what does that really mean? It means that for every tax break for the rich, everyone else in the country must become poorer! Because cutting the taxes on the rich has no trickle down effect, does not result in investment, does not create jobs, does not increase wages, any cut in those taxes must lower the standard of living of everyone else.

And that's what this whole dammed thread is actually all about: Austerity is about compelling most of the population to have permanently lower standards of living so that a handful of people can be richer without investing. It is about nothing else other than that. It is pure welfare for the wealthy. It is 100% redistribution of wealth at the expense of the creation of wealth. It is zero-sum-game.

 

[Yeekim]

No, no. I'm talking about the risky and unethical but not illegal behaviour that, you know, even the CEO of Goldman Sachs felt compelled to address recently; the kind of dishonest and greed-obsessed culture in the financial industry that people like Bob Diamond clearly tolerated if not encouraged.

I find it absolutely repulsive that that serpent has not actually been slayed when certain groups are preaching about austerity and wagging their fingers at the relative laziness of people who are not rich. That's why I'm asking: Whose fault is it really?

So you are simply angry with the perceived hypocrisy of those in financial sector, who are currently preaching austerity while they formerly used to fuel the boom with cheap loans and such?

Yeah, well, I guess you have a right to be pissed. :shrug: Although I don't quite understand what sort of behavior/change you would wish/expect to see. How should "the serpent" have been slain?

Sorry if this is too personal, but whenever I see you posting, it feels like you could almost do with "rants" subforum of your own. I liked you a lot better when you were doing Civ 4 challenges. They were what brought me to this site back in the day...

Austerity is about compelling most of the population to have permanently lower standards of living so that a handful of people can be richer without investing. It is about nothing else other than that. It is pure welfare for the wealthy. It is 100% redistribution of wealth at the expense of the creation of wealth. It is zero-sum-game.

So what's the alternative? Running a deficit would similarly be an paying interests for those who are willing to lend, i.e. the rich. Can US conceivably collect and raise enough taxes to pay its debts without cutting expenses at the same time?

 

[Cutlass]

So what's the alternative? Running a deficit would similarly be an paying interests for those who are willing to lend, i.e. the rich. Can US conceivably collect and raise enough taxes to pay its debts without cutting expenses at the same time?

Have an economic policy which doesn't permit the rich to screw over the country.

 

[Antilogic]

So what's the alternative? Running a deficit would similarly be an paying interests for those who are willing to lend, i.e. the rich. Can US conceivably collect and raise enough taxes to pay its debts without cutting expenses at the same time?

Numerically, it's absolutely possible. Whether or not you can get that implemented in policy is another matter.

I say this because studies on the marginal tax rates indicate that you can maximize revenue (accounting for evasion and elasticity) with a top rate somewhere between 55% on the low end and 90% on the high end. Since the top tax rates are somewhere around 35% on wage labor and much lower on capital gains, there's a lot of room to increase revenue.

 

[innonimatu]

So what's the alternative? Running a deficit would similarly be an paying interests for those who are willing to lend, i.e. the rich. Can US conceivably collect and raise enough taxes to pay its debts without cutting expenses at the same time?

OF course it can! Because the "money" is there. The very debt owed by governments is a portion of the assets of the wealthy! That was, in fact, one of the reasons why they wealth kept growing: creation of government debt enabled it. Not only that debt, certainly, but it makes up a great deal of the "reliable" assets piled up by the wealthy. Ultimately all financial wealth are claims on debts... Collecting enough to pay the internal debts of a government just means taxing the people who hold the assetswhich include that very same debt.
As for external debt, just grow a spine default. Sovereignty covers it.

The solution to the present problem is obviously not more of the same poison, more creation of debt. That is what the "powers that be" want: keeps them on top, keeps their assets growing ever more, gives them more political influence to demand things from the indebted plebs...

No, the rational solution is to default on all debt and then make sure that people's incomes balance out at least with what is necessary for the consumption of the products they create. So that the problem is not recreated again as usual. But that would be... communism, or socialism or some evil -ism, for sure!
Actually no, it would be the bare minimum to keep their precious capitalism working. But the idiots of the impoverished "middle classes" keep refusing to even consider it, because this redistribution thing might threaten their own pathetic assets. They're on a hole they keep digging themselves. Deceived into it, true, but they were born with brains. They keep refusing to make use of them...

 

[GoodGame]

The problem is inflation.

 

[innonimatu]

The problem is inflation.

Inflation? Inflation is a solution for the problem of wealth concentration! One of many possible solutions.

 

[EnglishEdward]

So you are simply angry with the perceived hypocrisy of those in financial sector, who are currently preaching austerity while they formerly used to fuel the boom with cheap loans and such?

The problem is not just the past, that people may forgive, but the present injustice whereby those in the financial sector demand that the state, via its state banks, provide them, via quantitative easing, more money to gamble on derivative markets etc; and the variously cowardly, corrupt or ignorant in government are doing just that while imposing austerity on the rest of this and claiming that this is all a virtue.

 

[aelf]

So you are simply angry with the perceived hypocrisy of those in financial sector, who are currently preaching austerity while they formerly used to fuel the boom with cheap loans and such?

Yeah, well, I guess you have a right to be pissed. :shrug: Although I don't quite understand what sort of behavior/change you would wish/expect to see. How should "the serpent" have been slain?

Thank you for highlighting the problem so clearly.

It's precisely people like you who shrug and say "Too bad" (while occasionally venturing to offer a lecture or two on the evils of welfarism) who are helping to perpetuate the problem. And no, it's not just a matter of hypocrisy or some other moral failing - it's a systemic problem with very tangible short-term solutions, particularly in the form of regulations. Something like the Glass-Steagall Act would be useful to start with, but that is not really on the cards yet at this point, with the banks naturally putting up a strong resistance and so far still managing to hold it off.

Sorry if this is too personal, but whenever I see you posting, it feels like you could almost do with "rants" subforum of your own. I liked you a lot better when you were doing Civ 4 challenges. They were what brought me to this site back in the day...

Yeah, life is more fun when you don't talk about the difficult issues.

 

[Yeekim]

Thank you for highlighting the problem so clearly.

It's precisely people like you who shrug and say "Too bad" (while occasionally venturing to offer a lecture or two on the evils of welfarism) who are helping to perpetuate the problem. And no, it's not just a matter of hypocrisy or some other moral failing - it's a systemic problem with very tangible short-term solutions, particularly in the form of regulations. Something like the Glass-Steagall Act would be useful to start with, but that is not really on the cards yet at this point, with the banks naturally putting up a strong resistance and so far still managing to hold it off.

Yeah, life is more fun when you don't talk about the difficult issues.

I would certainly appreciate any intelligent discussion on tangible short-term solutions, even though I probably couldn't offer much input.