What's the reason austerity is needed again?

[innonimatu]

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?

What, that's not obvious? You cannot possibly be so incompetent as to miss it, can you?
The rich people have the assents, among which are the claims on debts. The poor have... the debts. Fixing the "debt problem" has one, and only one, obvious solution. In fact it had only that one solution, the open discussion is only about how to get there.

Oh, and governments too. But governments have been the enablers and tools of the rich people for a few decades now. Where they should have taxed to cover spending, they borrowed. And (mostly) the rich people's assets rose correspondingly... that wealth was all the uncollected taxes that should have been collected. Because, you see, claims on debt are not economically productive, they're an accounting artifice. Higher taxes would not have caused economic problems. They would have caused a different distribution of wealth, and therefore a different distribution of power, but no reduction of material and human resources.

Would that different distribution of power have led to a better use of material and human resources, or a worse one? I'll say that the high unemployment (people and resources unused) tolerated for years, and not worsened in this crisis, is pretty damning to the "debt instead of taxing the precious wealthy entrepreneurs" model...

 

[Cheezy the Wiz]

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

Certainly not the people indebted to it.

 

[luiz]

I don't see any reason that would be true. Any austerity would be harmful far out of proportion to any benefit. The fix for SS is trivial, and only politics makes it hard. The fix for health care is much harder, but again it is politics, not money, which is the problem. In order to save money, the government has to take much more control of the system. But that does not mean a reduction in health services. private sector waste in the system is something like 5-7% of GDP.

The reason why an ageing society needs some degree of austerity is quite obvious. Most countries run some sort of public pension scheme and offer medical and other sorts of aid to the elderly. As more people consume those services and less workers pay the taxes that fund them, austerity is needed.

It wasn't universal, but on average the wealthy pushed the politics of the US to the right, supporting more conservative Democrats and Republicans.

You reap what you sow.

US politics were not alone in shifting to the right since the 60's. And the influence of "the rich" as in ordinary rich individuals was not the determining factor. The development model of the post-war era exhausted itself and the leading economists and academics of the world suggested several policies to remedy the situation, and those were usually a push to the right (in some issues anyway).

That doesn't answer the question: Given that capital was cheap as dirt, given that we were drowning in money that we couldn't find anything to do with, given that labor was weak, given that regulations to all intent and purposes had ceased to exist, given all of that, why did businesses generally refuse to invest? Every single factor tells you that there should have been a surge in business investment, and yet there was effectively none.

And you do not have an explanation for that that does not require you to accept that your theories are wrong.

At least I'm offering a theory!
I pointed out that the US of the pre-crisis years was consistently saving too little, and that the investment rate has been falling. So it makes sense to follow policies that reward investment at the expense of present consumption. What is your theory, given that it is a fact that consumer spending was high?

Finally, some quotes:

he main explanation for this difference is that U.S. investors faced a higher cost of capital than their Japanese counterparts. Comparative studies of the United States and Japan suggest that a lower Japanese cost of funds (as opposed to differences in the tax treatment of corporations, for example) is the major source of a cost-of-capital gap that appears to exist, or at least to have existed in recent decades, between the two countries. The cost of funds is higher in the United States because the low saving rate in the United States makes the supply of funds low and drives up interest rates.

The liberalization of international capital markets can offset the effects of low saving rates in particular countries. Investors living in countries with high saving rates can invest in countries, like the United States, that have low saving rates. This has happened and is the main reason for the large inflows of capital to the United States in recent years. Yet there remains a correlation across countries between levels of national saving and investment.

During the recession of 2001, for example, the U.S. government introduced a measure that significantly increased the tax benefits to firms that purchased new machines. This tax “subsidy” to the purchases of machines was meant to stimulate investment at precisely the time that it would otherwise have plummeted. This countercyclical investment policy follows significant precedent. In 1954, accelerated depreciation was introduced, allowing investors to deduct a larger fraction of the purchase price of a machine than had previously been allowed. In 1962, President John F. Kennedy introduced an investment tax credit to stimulate investment. This credit was enacted and repealed numerous times between then and 1986, when it was finally repealed for good. In each case, the Jorgenson model provided a guide to policymakers of the likely impact of the tax change. Empirical studies have confirmed that the predicted effects occurred.

 

[Cutlass]

The reason why an ageing society needs some degree of austerity is quite obvious. Most countries run some sort of public pension scheme and offer medical and other sorts of aid to the elderly. As more people consume those services and less workers pay the taxes that fund them, austerity is needed.

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.

US politics were not alone in shifting to the right since the 60's. And the influence of "the rich" as in ordinary rich individuals was not the determining factor. The development model of the post-war era exhausted itself and the leading economists and academics of the world suggested several policies to remedy the situation, and those were usually a push to the right (in some issues anyway).

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.

At least I'm offering a theory!

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?

I pointed out that the US of the pre-crisis years was consistently saving too little, and that the investment rate has been falling. So it makes sense to follow policies that reward investment at the expense of present consumption. What is your theory, given that it is a fact that consumer spending was high?

Finally, some quotes:

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.

 

[Yeekim]

Who's complaining about the bailout itself?

I was under impression that you did... maybe I was wrong, in which case I apologize.

The problem is the architects of the financial meltdown mostly got away scott free. Nobody was prosecuted or in the least bit punished. Certain groups are satisfied that they, naturally, lost a lot of money in the process, while lots of other people saw their lives ruined. And the financial reforms that were supposed to follow? Not nearly enough, according to most reports I've seen.

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.

Certainly not the people indebted to it.

You don't think their debts would simply disappear, do you? Their savings might, however.

 

[Leoreth]

You don't think their debts would simply disappear, do you? Their savings might, however.

Why shouldn't they? The question is more, what good is it to be debt free when you're out of your job on top of it?

 

[Mise]

If a bank went bankrupt, debtors would still owe money to the people who administered the bank under the bankruptcy protection procedures. Their loans are an asset for the bank that can be sold by the bank's administrator to repay creditors. So if Lloyds went bankrupt, Lloyds' administrators could sell their mortgage portfolio to Barclays. The mortgage holders then have their mortgages with Barclays instead of Lloyds. OTOH, as Yeekim said, savings are a liability for the bank -- and savers are the very last of the banks' creditors to get their money bank. When the administrators sell off the assets (i.e. loans), they pay their creditors according to the creditors' priority, which will depend on whether loans made to the banks by creditors are secured, unsecured, have clauses for bankruptcy, and so on. When the general public puts their savings into the bank, these are unsecured, and are at the very bottom of the list. It's basically impossible for savers to get their money back, which is why there are government-run deposit insurance schemes that banks pay into to protect some of the general public's savings in the event of bankruptcy.

You don't just suddenly get a free house when your bank goes bust. Nobody wins; everybody loses.

 

[Yeekim]

Why shouldn't they? The question is more, what good is it to be debt free when you're out of your job on top of it?

Because these claims are assets which obviously can and will be sold?
EDIT: nah, x-post

 

[Leoreth]

I thought we were talking about a scenario where the whole banking system collapses.

 

[Yeekim]

I thought we were talking about a scenario where the whole banking system collapses.

Unless this collapse happens due to a global-scale extinction event, there is going to be someone who is interested in buying that portfolio...

 

[Mise]

Yeah, and even if not, someone would still own the assets and be around to take payments. Even if the administrators couldn't sell them, and therefore could not repay the banks' creditors, the administrators would probably just give the assets to the creditors at a nominal value. Then if those creditors became bankrupt themselves as a result, the assets would transfer to their creditors. And so on. For nobody to own those assets, it would require a failure of the entire legal system. It would take years to unpick exactly who owned what, but the administrators of the bank who originated the mortgages and loans would still be around to take payments from mortgage holders.

The only way for debts to "magically" disappear is if we had hyperinflation, which I'm sure everyone will agree is bad for everyone (except the super-rich, who have gold, diamonds and other physical assets to protect them). It would probably be the very-poor, who rent their homes and depend on, you know, having a job, to make ends meet.

EDIT: For those people on variable rate mortgages, the banks could raise interest rates to 1,000,000,000,000% and then foreclose on them when they fail to make repayments.

 

[Cheezy the Wiz]

You don't think their debts would simply disappear, do you? Their savings might, however.

If one disappears, so does the other, because a bank account is debt the bank owes YOU. If how it works is that only my debt survives to be owed, and theirs goes away, then, well, maybe you should rethink that "pulling bankers into the streets is a bad idea" thing..

 

[Yeekim]

If one disappears, so does the other, because a bank account is debt the bank owes YOU. If how it works is that only my debt survives to be owed, and theirs goes away

Well, firstly, savings are usually (at least in EU, no idea about US) guaranteed by appropriate state-mandated fund... up to certain amount. Although that obviously wouldn't cut it in some kind of total meltdown scenario.
So, that aside, you are correct that you would also be one of the creditors who could benefit from the sale of that mortgage portfolio. But the very idea of bankruptcy being that assets aren´t enough to cover the claims, you would still suffer a loss. Possibly huge one.

Bottom line is, even those indebted to a bank would not benefit from its bankruptcy. Unless they themselves managed to buy claims against them at a discount price. Which is not going to happen for a regular Joe.

then, well, maybe you should rethink that "pulling bankers into the streets is a bad idea" thing..

Not sure what you mean by that?

 

[Mise]

The bank owes you money when you put savings into a bank account, yes. But the bank also owes a whole bunch of other people money (e.g. other banks, bondholders, etc), and those creditors are always first in line. When banks go bust, there is never enough money to pay back all creditors, so savers very rarely get much of their money back. You just have to look at previous bank bankruptcies to see that. This is why the banks have to pay into a government-run deposit insurance scheme, which will pay depositors in the event of bank failure. (Assuming the government can afford to.) This is the way that depositors usually recover their savings. The money they actually put into the bank just is gone.

To say that "if one [savings] disappears, then so does the other [loans]" is simply incorrect. That's just not how it works.

 

[Cheezy the Wiz]

Well, firstly, savings are usually (at least in EU, no idea about US) guaranteed by appropriate state-mandated fund... up to certain amount. Although that obviously wouldn't cut it in some kind of total meltdown scenario.
So, that aside, you are correct that you would also be one of the creditors who could benefit from the sale of that mortgage portfolio. But the very idea of bankruptcy being that assets aren´t enough to cover the claims, you would still suffer a loss. Possibly huge one.

Point taken.

The FDIC insures in name only. They don't even have the funds to fully save a single branch of a single bank, if there were a true run on that bank.

Bottom line is, even those indebted to a bank would not benefit from its bankruptcy. Unless they themselves managed to buy claims against them at a discount price. Which is not going to happen for a regular Joe.

Well, I put my money into a federal credit union for a reason: they don't behave like the other greedy private banks do. I don't have to worry about them overleveraging, because they exist for our benefit. It's almost pseudosocialist: we own the company, vote for the offices, and they exist to provide optimal financial services to their clients, not the most massive returns possible for a few bankers up top.

Not sure what you mean by that?

The idea that a rich person's debt can go away, but yours cannot, should lay the system of, structural stealing from the poor by keeping them in debt, very clearly at your feet. I mean, I know you are a man of affluence, but let's be real: you're not "rich" in the sense that I obviously mean it.

If I am indebted to a person, and that person dies, my debt follows him to the grave. It should be the same for financial institutions.

 

[Mise]

Incidentally, banks typically fail when loans they make go bad. I.e. they lend money out to people who don't pay it back. That money just disappears; the bank doesn't get it back. So some of the loans they have made have indeed disappeared, if you were looking for one side of the ledger to balance with the other.

EDIT: If you are indebted to a person, and that person dies, then you are indebted to that person's estate.

 

[Yeekim]

The idea that a rich person's debt can go away, but yours cannot, should lay the system of, structural stealing from the poor by keeping them in debt, very clearly at your feet.

I would not describe a bank as a "rich person", but even so, your debt can similarly "go away", if you go bankrupt. I remember learning from this very forum that consequences to physical persons are rather lenient in US...

I mean, I know you are a man of affluence.

Hardly. I work for a state salary these days (indeed around twice the local average)... but then I've had to feed a family of four, single-handedly, for few years now. And the local average isn't exactly high anyway, so the expenses have a worrying tendency to stay ahead of my incomes...

If I am indebted to a person, and that person dies, my debt follows him to the grave.

I would be inclined to settle the debt with his heirs...

 

[GoodGame]

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.

It's basically the wars, the bank bailout, and welfare spending (including corporate welfare, not just the unemployed) in about equal measures +_ a few hundred billion on each of the above. Figures I'd found put each of the three 'projects' to about 1.1 trillion each. The total debt is about 15.5 trillion today and was around 4.5 trillion in 2000, so somehow we accrued about 11 trillion in spending. I'm not sure of the impact of the Bush tax cuts on debt and GDP, so I'd leave those out. That's not to ignore other spending. E.g. NASA spending from 2000 to 2012: 13x annual average of 16billion gives ~$0.2 trillion in comparison.

On the dependency issue, Romney seemed to suggest small business initiatives over government spending-based dependency. Both Romney and Obama seemed to agree that education was a path to that.

Romney claimed flat tax breaks last night. Obama claimed progressive taxing as normal.

 

[Crezth]

I don't understand why people don't just get born white and rich. It's so simple and yet these idiotic poorlings don't even do it.

 

[Terxpahseyton]

Yeah, they should have gutted themselves when given the chance.