What's the reason austerity is needed again?

[aelf]

The financial crisis was only a few years ago, but I think we might need to refresh our memories. What is the reason why Western countries have ballooning deficits? Is it because of the welfare state, or is it because they just had to spend a lot of money propping up failing banks?

There's lots of talk about unsustainable welfare systems and cultures of dependency. I'm just wondering who are the major recipients of said welfare and are dependent on the state to such an extent that austerity is now supposedly necessary despite the global economic slowdown.

And, as a bonus question, why do the rich need tax breaks but low and middle-income groups don't need tax breaks and benefits?

Please give me your answers.

 

[galdre]

the problem isn't welfare or the bailouts of the banks, the problem is the wealth is all going to the top while everyone else is getting poorer.

 

[WindFish]

Welfare recipients are an easy target and rich people can buy elections.

Its class warfare baby and they fired the first shots.

 

[AlpsStranger]

My rule about conservative projection applies to "class warfare" as well.

 

[Borachio]

<nvm>

 

[hobbsyoyo]

What is the reason why Western countries have ballooning deficits? Is it because of the welfare state, or is it because they just had to spend a lot of money propping up failing banks?

The US and other Western countries ran up deficits by creating entitlement programs (and in the US's case, massive military outlays) that they did not raise enough taxes or cut other programs to pay for.

In the US's case, we actually took a budget surplus and turned it into major deficit by passing two major tax cuts, then our economy cratered in ~2001 and our military spending climbed unabated. We seem to be allergic to tax hikes since the mid 90's.

There's lots of talk about unsustainable welfare systems and cultures of dependency. I'm just wondering who are the major recipients of said welfare and are dependent on the state to such an extent that austerity is now supposedly necessary despite the global economic slowdown.

The biggest beneficiaries of the government welfare are the elderly. However, it is politically easier in the US to go after 'welfare queens' rather than talk about serious reform for Social Security and Medicare. Unfortunately, we do have one party that wants to reform Social Security but would do so by privatizing it and essentially turn it over to Wall Street because the stock markets aren't volatile or anything.

Austerity could help deficits if the economy is also growing. If it isn't growing, you do more harm to the economy by raising taxes and cutting spending than any benefit you would get back on the budgetary side. Hurt the economy enough through austerity, and you'll end up hurting the budget as well as tax reciepts dry up.

People who clambor for austerity in the US usually don't know how the economy works or are rich and wish to see their taxes lower. I could be wrong on this as I am obviously biased, but that's how it seems to me.

And, as a bonus question, why do the rich need tax breaks but low and middle-income groups don't need tax breaks and benefits?

Trickle down economics. The theory is that the rich create jobs and cutting their taxes mean they will hire more people. In reality, we have, what, 30 years of proof that this isn't so? They only horde the money, they don't create anything with it.

What is especially insidious are right-wing plans to somehow cut the deficit by cutting taxes and spending (but mostly taxes) and also give proportionally bigger tax cuts to the rich than to the poor. They only talk about this in the vaguest terms, I guess to fool people, but if you think about say, Romney/Ryan's budget for 10 minutes, it's hard not to reach this conclusion.

 

[Verbose]

The financial crisis was only a few years ago, but I think we might need to refresh our memories. What is the reason why Western countries have ballooning deficits? Is it because of the welfare state, or is it because they just had to spend a lot of money propping up failing banks?

It seems a little different between places, but thinking about the Eurozone...

Government revenue is falling because people are out of work, and out of income. They're not just claiming dole money, they're unable to pay taxes like they used to. So government is hoping like hell the global economy turns around soon, which should mean more jobs, and with people back in employment and able to pay taxes like they used to again. In the mean time the traditional idea is trying to tide things over by deficit spending. But on top of that come the requirements to slash government spending to balance budgets asap (to get necessary Eurozone support). Only, cuts in government spending also mean more people out of work, not paying as much tax, meaning less government revenue again, meaning more deficit, meaning more cuts to government spending, etc... While we still wait for the global economy to turn around.

As for propping up failing banks: Not in Europe. It could definitely have been an option. Essentially the Eurozone is spending money on bailing out indebted governments. It could also have opted to write off a lot of government debt, and sink the same amount of money into propping up failing banks left holding the bucket. That however would have meant we wouldn't be talking about PIIGS and "irresponsible" southern Europeans etc., but rather about "The Great Germano-Franco-Anglo Banking Crisis" or somesuch.

 

[Berzerker]

What is the reason why Western countries have ballooning deficits? Is it because of the welfare state, or is it because they just had to spend a lot of money propping up failing banks?

Corporate welfare is part of our welfare state... Handing billions to business doesn't look so bad when the treasury's being looted by every special interest group with a few politicians in their pocket.

 

[anandus]

[...]

As for propping up failing banks: Not in Europe.

In the Netherlands the propping up of failing banks increased the government debt in 2008 by 50% (it'd cost about 150bn euro's, debt as GDP went from 45% to 60%).

 

[Antilogic]

You see, by implementing austerity programs and thus reducing spending in a time of globally reduced spending, people will become more confident to spend their own money so businesses will sell more stuff despite the fact people are buying less stuff. Somehow.

Well, I tried.

 

[Cutlass]

Deficits are going up because the rich and the financial services sector of the economy are not doing any work. Because finance does no work, too many of the lower class does not have any work. And so there are much lower government revenue, and many more people dependent on government transfer payments.

 

[luiz]

Not a very hard question. The countries running deficits need austerity because they can't increase their debt forever. Over time the mere financing of the debt would be a brutal burden.

For the countries running large deficits there really is no debate about whether they need austerity. They need, period. The debate is the timing of the austerity.

As for your last question. Cutting taxes for the rich in times of austerity is a dumb idea, unless the rate is so high you can actually increase revenue by doing that. This isn't the case is the great majority of cases, but is probably true in say Sweden (if they haven't cut their top rates a bit already). Some particular taxes may also be counter-productive, like the capital gains tax. Yes, I know cutting that tax overwhelmingly benefits the rich, and I know the economically illiterate think the rate should actually be higher, but the fact is it should be very low (and most economists would even suggest abolishing it).

 

[Cutlass]

Cutting the cap-gains tax rate in the US had no positive impact on business investment. Business investment rates actually declined.

 

[luiz]

But if you analyse all variables in an econometric regression I'm willing to bet that the effect of the tax cut was, ceteris paribus, an increase in business investment.

 

[Cutlass]

Then you have to give an explanation for why new business investment declined. There's no actual reason that a lower cap-gains rate would result in more investment. It actually makes more sense that it would decrease it.

 

[Disgustipated]

Why not raise taxes on the rich to 90%?

By rich I mean anyone making over $1 million a year. That would essentially put them at $100k a year which is reasonable. Obviously you'd have to include capital gains and other income sources to help combat these guys paying themselves $1 a year.

It won't solve the deficit problem, but it will help.

I don't actually support the above idea, but I do want to punish the rich some more. But I still don't believe people should get money from the government without doing any work (see my signature). Put these lazy aholes to work. I'm against all welfare except disability (which should be verified with physical tests)

 

[luiz]

Then you have to give an explanation for why new business investment declined. There's no actual reason that a lower cap-gains rate would result in more investment. It actually makes more sense that it would decrease it.

Investment levels in the US have generally declined drastically as the savings rate collapsed and the economy became driven primarily by consumption. That's why it makes a lot of sense to eliminate capital gains tax, as a high rate encourages consumption over investment.

There's absolutely no reason why a cut would cause a decrease in investmnet.

 

[JohnRM]

There is a culture of dependency in America, but of course it applies to the wealthy and conservatives, as well. The problem seems to be a matter of timing rather than who gets what or to what extent. Government can be an effective tool for when natural processes are either doing harm or not doing a good that the people find necessary, at that time. In general, what I mean by that is; When times are good, there ought be to serious rollbacks on social welfare spending. However, when conditions worsen, the government ought to come in like Gangbusters and do the necessary things to get the economy back on track quickly or at least head off downturns at the pass. I think that one of our major problems is that most handouts end up being permanent.

My rule about conservative projection applies to "class warfare" as well.

I very much like this rule.

 

[Cutlass]

Investment levels in the US have generally declined drastically as the savings rate collapsed and the economy became driven primarily by consumption. That's why it makes a lot of sense to eliminate capital gains tax, as a high rate encourages consumption over investment.

There's absolutely no reason why a cut would cause a decrease in investmnet.

There's absolutely no reason why a low cap gains tax would have any expectation of raising investment. It's nonsensical on the face of it. The cap gains tax in practice really isn't about investment, it's about transactions. Instead of encouraging investment, a low cap gains tax encourages frequent transactions. But frequent transactions are harmful to real investment. They dramatically reduce the time horizon of investment, and so make it far less attractive.

Now the US savings rate collapsed at the same time as tax rates went down. And it's not a coincidence. Savings went down because of the stagnation of incomes which is part and parcel of a government that no longer supports economic growth, which is what the low tax Reaganomics trickle down theories really are in the first place.

 

[luiz]

There's absolutely no reason why a low cap gains tax would have any expectation of raising investment. It's nonsensical on the face of it. The cap gains tax in practice really isn't about investment, it's about transactions. Instead of encouraging investment, a low cap gains tax encourages frequent transactions. But frequent transactions are harmful to real investment. They dramatically reduce the time horizon of investment, and so make it far less attractive.

Now the US savings rate collapsed at the same time as tax rates went down. And it's not a coincidence. Savings went down because of the stagnation of incomes which is part and parcel of a government that no longer supports economic growth, which is what the low tax Reaganomics trickle down theories really are in the first place.

Nope. A high capital gains tax limits the profitability of investment, and thus encourages people to spend rather than save. This is obvious on the face of it.

But hey, don't trust me. Trust someone with impeccable leftist credentials like Matthew Yglesias:

...
But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.

The reasoning is basically this. You imagine two prosperous but not outrageously so working people living somewhere—two doctors, say, living in nearby small towns. They're both pulling in incomes in the low six figures. One doctor chooses to spend basically 100 percent of his income on expensive non-durables. He goes on annual vacations to expensive cities and eats in a lot of fancy restaurants. The other doctor is much more frugal, not traveling much and eating modestly. Instead, he spends a lot of his money on hiring people to build buildings around town. Those buildings become houses, offices, retail stores, factories, etc. In other words, they're capital. And capital earns a return, so over time the second doctor comes to have a much higher income than the first doctor.

So then there are too different scenarios:

— In the world where investment income isn't taxed, the second doctor says to the first doctor "all those fancy vacations may be fun, but I'm being much more prudent. By saving for the future, I'll be comfortable when it comes time to retire and will have plenty left over to give to my kids."
— In the world where investment income is taxed like labor income, the first doctor says to the second "man you're a sucker—not only are you deferring enjoyment of the fruits of your labor (boring) but when the money you've saved comes back to you, it gets taxed all over again. Live in the now."
And the thinking is that world number one where people with valuable skills take a large share of their labor income and transform it into capital goods is ultimately a richer world than the world in which such people just go out to a lot of fancy dinners.
...

http://www.slate.com/blogs/moneybox..._low_most_economists_think_it_should_be_.html