What's the reason austerity is needed again?

[Mise]

The reason we (the UK) have so much debt is because we bailed out the banks. The reason we can't pay it back is because we're in a recession (lower tax revenues). The first thing is about total government debt; the second thing is about the deficit.

For all the political theatre in the UK, there is really very little difference between the 3 main parties' prescriptions for what we should do about it. We seem to have reached a consensus here that the structural deficit should be eliminated in basically the same time-frame (Tory/Lib Dem = by the end of this parliament; Labour = by the end of this parliament + 1 year). It's been that way ever since the crisis started -- everyone is saying basically the same thing, and hoping that it all works. The main differences between the parties are about (a) what they'd cut, (b) how much they'd cut, (c) how quickly they'd cut, and (d) how much they'd raise taxes by. Those things make very little difference to the overall picture, but for real people on the ground, it can have a major impact.

 

[Cutlass]

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:


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

You know how you can pay $0 cap gains over your entire lifetime? Don't sell the stock. How do you pay a lot? Churn your stock often.

But that fundamentally misses the point. Lowering the cap gains tax rate has not improved investment in the past, and cannot be expected to do so in the future, because it is a solution in search of a problem rather than a solution to an existing problem. If you fundamentally misdiagnose the problem of American investment as not being enough capital out there, or investment not being profitable enough, even though obviously neither of those things is true, then you are going in entirely the wrong direction. America's investment problem is a demand problem, not a supply problem. Businesses are not investing because they cannot sell the products. Changing the taxes on business or investment makes such a trivial difference to that that it isn't even something to bother considering until the real problems are dealt with.

 

[innonimatu]

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.

You seem to be under the delusion that some people can spend without other people investing and profiting from it. The reality is that the whole economy balances out in the end. Stupid economists, though, keep missing large portions of it in their amazing models...

Is some people spend then other people must spend on building up productive capacity, period.
If everyone starts saving then no one will invest: falling demand cuts investment, that much is be obvious to any businessman. Not to many economists, though! Savings will just be recycled in speculative bubbles inside the financial system. Just like... now! It's even worst, though: because savings are no more than credits and the destruction of demand destroys the value of assets, the savings are actually being constantly devalued in real terms, even if in nominal terms they seem to grow. The financial collapse of this crisis, when it finally arrives after all the games played by banks and states, will be interesting to watch...

But hey, don't trust me. Trust someone with impeccable leftist credentials like Matthew Yglesias:
http://www.slate.com/blogs/moneybox..._low_most_economists_think_it_should_be_.html

Oh, another idiot of an economist. Right...

 

[luiz]

You seem to be under the delusion that some people can spend without other people investing and profiting from it. The reality is that the whole economy balances out in the end. Stupid economists, though, keep missing large portions of it in their amazing models...

You're giving economists too little credit. They may get a lot of stuff wrong, but not trivial issues like these.

Of course somebody is profiting from consumption. Consumption does raise GDP in the present, when it happens. What I was pointing out is that by deferring consumption GDP can grow even more in the future. Naturally, there's no point in deferring all consumptions - we need to eat and also to enjoy the present - but it's good to encourage a healthy mix between present consumption and future consumption. That's the whole point of "Intertemporal Equilibrium Economics", and that's why we know that taxing capital gains too much is bad.

Is some people spend then other people must spend on building up productive capacity, period.

No, not really. Imports may fill the spot. Inflation will happen if consumption rises faster than production and imports. And so on.

If everyone starts saving then no one will invest: falling demand cuts investment, that much is be obvious to any businessman. Not to many economists, though! Savings will just be recycled in speculative bubbles inside the financial system. Just like... now! It's even worst, though: because savings are no more than credits and the destruction of demand destroys the value of assets, the savings are actually being constantly devalued in real terms, even if in nominal terms they seem to grow. The financial collapse of this crisis, when it finally arrives after all the games played by banks and states, will be interesting to watch...

Again, you give economists way too little credit.
They don't deny that you need a healthy mix between consumption and savings. They don't deny that there's a limit to economic growth that can be achieved through massive savings rate (that's a standard feature of any modern economic growth model). They just point out that too little savings leads to low investment and low growth. See the US in recent times.

Oh, another idiot of an economist. Right...

Actually I think he is just a left-leaning blogger.

 

[aelf]

As for propping up failing banks: Not in Europe.

Is that so in the UK and Spain?

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.

But you seem to have ignored an important part of the OP. What contributed to countries' debts such that they have to reduce their debts drastically now?

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).

So how would the bankers pay their share in austerity when the poor and middle class are getting tax hikes and reduced benefits?

 

[Cutlass]

You're giving economists too little credit. They may get a lot of stuff wrong, but not trivial issues like these.

Of course somebody is profiting from consumption. Consumption does raise GDP in the present, when it happens. What I was pointing out is that by deferring consumption GDP can grow even more in the future. Naturally, there's no point in deferring all consumptions - we need to eat and also to enjoy the present - but it's good to encourage a healthy mix between present consumption and future consumption. That's the whole point of "Intertemporal Equilibrium Economics", and that's why we know that taxing capital gains too much is bad.


No, not really. Imports may fill the spot. Inflation will happen if consumption rises faster than production and imports. And so on.



Again, you give economists way too little credit.
They don't deny that you need a healthy mix between consumption and savings. They don't deny that there's a limit to economic growth that can be achieved through massive savings rate (that's a standard feature of any modern economic growth model). They just point out that too little savings leads to low investment and low growth. See the US in recent times.


Actually I think he is just a left-leaning blogger.

You're assuming that any deferred consumption would go into investment. And the reality is that investment is low because of the lack of consumption. So deferring consumption just inflates bubbles.

 

[Yeekim]

So how would the bankers pay their share in austerity when the poor and middle class are getting tax hikes and reduced benefits?

A simple question for you, my noble class-warrior:
Who do you think would suffer most, if a bank went belly-up?

 

[LegionSteve]

A simple question for you, my noble class-warrior:
Who do you think would suffer most, if a bank went belly-up?

The taxpayer, because the government will bail them out. At least here in the UK they do. The bankers know this.

 

[Mise]

He means if the government doesn't bail them out, obviously. The answer is the same of course: everybody in the country -- except this time, it's much much worse.

 

[Verbose]

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).

No it's probabaly true, and just in today's news is how Sweden has the world's highest marginal tax rate (56,5%). What has happened is that the cut-off point on incomes for paying that kind of taxes has consistently been jacked up by the lib-cons government in the last five years.
(I've experienced it myself. In five years my net wage has increased by 17%, but my take after taxes by +30%. There are other things they've been doing, like a big tax-break on artisanal services, which has meant there is a lot less amateurish home-improvement tinkering by Swedes, who now can better afford to hire professional contractors to fix things properly.)

On the other hand the Swedish total govt debt is below 40%, and the country has been running surplus or at least balanced budgets in the last years of crisis, while at least mirroring US GDP growth levels, even without any kind of overt budget stimulus...

 

[luiz]

But you seem to have ignored an important part of the OP. What contributed to countries' debts such that they have to reduce their debts drastically now?

A lot of things, and the answer varies from country to country. Naturally the bank bailouts, in the places where they happened, were a huge strain on public finances.

But the permanent cuts and tweaks which are needed in a lot of entitlement programs in many countries are not the result of bailouts, but of the fact that they were on an unsustainable path. Look at the US. Between 2011 and 2025, the number of retirees on Social Security will grow by nearly 50 percent to 66 million people; Medicare experiences a similar rise. The resulting spending surge perpetuates huge budget deficits. The Congressional Budget Office estimates that present policies would result in cumulative deficits of $10 trillion from 2013 to 2022. So austerity is needed with or without bailouts (and no, you can't solve that by milking the rich - see here)

So how would the bankers pay their share in austerity when the poor and middle class are getting tax hikes and reduced benefits?

They'll "pay their share" through income tax hikes and will lose part of their net worth as the stocks they own fail to pick up in a weak economy. Some of them will become even richer, though.

But of course the point of any sensible policy-makes is not to punish the rich, but rather to adopt policies that will raise the general welfare. Several policies aimed at "punishing the bankers" would do more harm than good for the general population, so why pursue them?

You're assuming that any deferred consumption would go into investment. And the reality is that investment is low because of the lack of consumption. So deferring consumption just inflates bubbles.

Right now consumption may be low, but over the last years consumption in the US was too high and savings too low, leading to low investment and growth.

 

[ELITEOFWARMAN8]

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.

No, it's government screwing up and people spending money when they don't have it. That's why the poor are getting poorer and the rich are getting richer.

Besides, you think taking most of the Rich people money will help?

 

[hobbsyoyo]

No, it's government screwing up and people spending money when they don't have it. That's why the poor are getting poorer and the rich are getting richer.

Besides, you think taking most of the Rich people money will help?

Yes this would help the poor quite a bit.

If the rich are the job creators, where are the fracking jobs? They horde their cash and pass it along to their descendents. They don't spend enough of it or create new enterprises enough with their money to help the economy out. But they're the mythical 'job creators', so they should be allowed to game the tax system to be able to horde even more money, amiright?

 

[ELITEOFWARMAN8]

So if I was successful and become rich, you want me to give it to some poor person who can't work as hard as me? No thanks.

 

[Ailedhoo]

So if I was successful and become rich, you want me to give it to some poor person who can't work as hard as me? No thanks.

Sorry to bust your selfish bubble but the poor do work hard. I think you need to read this Cracked article on the matter. Just slight warning: it has a few swears but it values is to be read for.

 

[Core Imposter]

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.

First of all austerity is the absolute wrong word. I'll ignore the tempation to throw a brick to the left here, but the phrase we should be using is fiscal responsibility.

Here is the issue. Democracy has a problem. The system is subject to the "squeaky wheel gets the grease" problem. Pols need votes and thus need to apply oil (money) liberally to garner said votes to preserve power. This leads to ever increasing spending and taxes.

Historically, political parties have sought to differentiate themselves by favoring different types of spending in order to establish political bases. In the US the right favors "guns" while the left argues "butter". The public regulates the ratio of spending in elections and by the push back on taxation which keeps the situation under control.

But the system is broken. Modern economic theory has advanced the deficit solution which basically says that its not only okay to go into debt but that its stupid not to leverage up to the greatest possible extent. Surprise, surprise. Pols love this. It has allowed them to both cut taxes and increase spending to such a ridiculos extent that we are near, if not past, the point of no return. In the US, we no longer even pass budgets. Sovereign defaults seem inevitable, in fact are underway, not in the third world but in the developed democratic sphere.

This isn't an issue of left or right. We can't solve this by pointing fingers at each other. The point is that we can't afford the level of spending that we are doing now much less the level projected. We can't fix this by raising taxes. You can't raise taxes enough to cover this. We are going to stop spending this much, either by choice or by necessity.

What is the reason why Western countries have ballooning deficits?

Governments borrow and spend too much. (and you should include Japan in this).

 

[hobbsyoyo]

So if I was successful and become rich, you want me to give it to some poor person who can't work as hard as me? No thanks.

Please don't make the assumption that poor people don't work hard. It's rude and unwarranted as well as patently false.

And yes, you should give more money to ensure poor kids get a good education, that poor people don't have to die for lack of healthcare or food. Doing this is in your best interest as a rich person as you depend on a strong, talented and well educated working class to support your endevours.

 

[Core Imposter]

It makes no sense to try to raise taxes without putting in something to govern the pols. Like a balanced budget amendment to our constitution. Because if you raise taxes they will just spend more. We have to back them up to a wall, or we will go broke.

The plan in place now seems to resort to stealth tax (inflation). That the Bernacke card. But it won't work.

 

[ELITEOFWARMAN8]

Sorry to bust your selfish bubble but the poor do work hard. I think you need to read this Cracked article on the matter. Just slight warning: it has a few swears but it values is to be read for.

Yeah well, I really don't care. My family been poor most of my life and we have to work hard and no one is giving us a hand out. So go work for it like me and my family does.

Please don't make the assumption that poor people don't work hard. It's rude and unwarranted as well as patently false.

And yes, you should give more money to ensure poor kids get a good education, that poor people don't have to die for lack of healthcare or food. Doing this is in your best interest as a rich person as you depend on a strong, talented and well educated working class to support your endevours.

Yeah well, I don't care. Tell them go get a job and work for it. This isn't Africa or Asia where people literally make nothing.

 

[WindFish]

Yeah well, I don't care. Tell them go get a job and work for it.

Please tell me where these jobs are and where they are supposed to come from?

Because many people like me would surely like to smegging know.