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I'm fascinated that there's still a debate on the question of whether the best way to help the economy in the long run is by higher taxes on the rich plus government stimulus versus austerity and lower taxes. You would think that with so many governments around the world trying one policy or the other for the past hundred years we would have an unambiguous track record to inform us. One of those approaches - stimulus versus austerity - must be better than the other, right?

Instead of clarity, I see proponents of government spending and higher taxes cite the Clinton administration as a time when higher tax rates coincided with a booming economy and a more balanced budget. Proponents of austerity point to Estonia's recent success in belt-tightening. Where's my clarity, damn it?

I declare a link war!
In the comments, give me links to support one argument or the other with historical examples. Keep your comments brief, please, with just a summary of the link. I'll compile them and declare a winner.

My bias going into this is that the best approach to stimulus versus austerity depends on whatever else is happening in the economy. If you have a dotcom boom happening, you can probably raise taxes with impunity and balance the budget too. If not, perhaps the austerity thing makes more sense. That's my starting point. I'd like you to change my mind.

Link on!

[Update: This link will be hard to beat. Thanks to Kuvuplan for that.]


 
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Oct 1, 2012
Scott, question, should you raise taxes or lower taxes? Link war!
Wait, are we talking about taxes in the Cayman Islands or Sweden? Sweden has huge taxes, but the public is happy with what they buy with their tax dollars (if I spoke Swedish I'd move there).
It isn't just the tax rate, it is what your government spends money on (think third world nations which spend more on military than domestic spending, like the US).
It is how efficient your government is (Aetna only spends 81% of premiums collected on medical care, Medicare spends 97%, I think it is obvious who the inefficient bureaucracy is...)
So the question of austerity vs stimulus is a nonsense question. Greece should probably look at austerity, because they have large government spending and a small tax base. The US has a huge tax base, and if you take out Social Security, Medicare, and Unemployment insurance, we only spend about 10% of our GDP on the government, over half of which goes to the military. When only 5% of your nation's spending is actual government spending on the domestic economy (vs 20% going to the bankers), stimulus makes a lot of sense.
I think that is why you got such wonky results, of course everyone can point to a case that supports them... Just like folks in a 80% tax rate nation can say "lower taxes and increase collection," while someone in a nation with a 20% tax rate says "lower taxes and your collection can't possibly increase."
 
 
Sep 17, 2012
@KingDinosaur: You say "the US could print 60 trillion tomorrow". You, like Scott Adams, don't seem to understand the difference between fiscal, and monetary, policy. Printing money is monetary policy. It has NOTHING to do with fiscal deficits, the topic of Scott's post.

(Of course, the problem is that LACK of printing money has EVERYTHING to do with the current recession, which was caused by US Fed errors in monetary policy, and had nothing to do with any fiscal policy, either stimulus or austerity.)
 
 
Sep 17, 2012
Okay, I googled countercycle and this is what it brought up:

http://en.wikipedia.org/wiki/Keynesian_economics
{ Keynes developed a theory which suggested that active government policy could be effective in managing the economy. Rather than seeing unbalanced government budgets as wrong, Keynes advocated what has been called countercyclical fiscal policies, that is, policies that acted against the tide of the business cycle: deficit spending when a nation's economy suffers from recession or when recovery is long-delayed and unemployment is persistently high—and the suppression of inflation in boom times by either increasing taxes or cutting back on government outlays. He argued that governments should solve problems in the short run rather than waiting for market forces to do it in the long run, because, "in the long run, we are all dead."[12] }

So yeah, that doesn't work in real the world. Sounds good, but he was basically advocating Keynensian economics.

A Forbes op/ed Keynesian economics:
http://www.forbes.com/sites/peterferrara/2012/07/12/obamanomics-the-final-nail-in-the-discredited-keynesian-coffin/

 
 
Sep 17, 2012
Out of curiosity how much stimulus or austerity is allowed? Even Keynes said not to go over 20% deficit spending (Obama is in the 30% or more range) and realistically, even if you support it, there's got to be some upper limit. I mean the US could print 60 trillion tomorrow, pay of the debts, and still have 45 trillion to throw around. However if the US did that, our money would be worthless and oil will be $400 or more a barrel (that means gas will be around $16 a gallon).

The same question can be applied to austerity measures: how much less than your should you spend to pay off your debts faster? If the US spent $0, we wouldn't even be able to afford the person to write the checks to pay of the debts or collect and process the taxes. So clearly, unless you can run a government 100% from volunteers and donations, there must be a bottom limit as well.

The link Scott posted, while I disagree with it, at least has the ring of prudence, whether it is in the real world is another matter. However, if you were to believe it and you wanted to engineer permanent stimulus, all you'd need to to is have a permanent depression, which a government could probably pull off.

IMO unless your are at war or a similar spend or die scenario like there's literally no food (and only spend extra for the war or whatever it takes for survival and nothing else) no deficit spending.
 
 
Sep 17, 2012
The Depression of 1920-21

http://www.firstprinciplesjournal.com/articles.aspx?article=1322&theme=home&loc=b

 
 
Sep 15, 2012
Scott, In response to your request on my Sept 13 blog post, my mentor Warren Mosler, Senior Economic Advisor to the USVI Senate President, 29th Legislature, replied
"The US under Bush?
And Reagan?"

---Mac
P.S. I'm no economist, Warren is. I just raced Warren's cars. Racing for Warren was like getting a meal at the Salvation Army: I had to listen to the lecture to get the good stuff (driving the race car). Believe it or not, I learned some things. The main one: Almost everyone is working off false assumptions. The main one: Money to the Federal government is wholly unlike money to you, businesses, cities and even states. The Federal government can create money as easily as an NFL scoreboard operator can create time: "Put 38 seconds back on the clock," says the referee and BOOM 38 seconds are back on the clock. He didn't borrow them from the future or steal them from the past. And we will not have to pay for the "lost" 44 seconds in Monday night's Broncos-Steelers game.

 
 
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Sep 15, 2012
Drowlord, you honestly don't have a clue. The reason Jews are in danger in that country has nothing to do with "Islamophobia". The connection is the exact opposite of what you say, because the attacks on Jews are being carried out by immigrant Muslims. The anti-Semitism in Sweden is part and parcel of its multi-cultural political correctness.

And of course Islamophobia is "cited" as a problem, just like Obama's birth certificate is cited as a problem. You don't provide any third-person evidence for it. Seems to me that in view of all the rapes and anti-Semite attacks carried out by Muslims immigrants in Scandinavia, together with their disproportionate reliance on welfare, it seems to me that these are getting a comparatively easy ride. What other place other than Scandinavia would they accept a culture of immigrants who come in and sit at home on welfare and orchestrate divisive protests and waves of rape and anti-Semite attacks? The answer is no place, with the possible exception of Holland. Scandanvia is a paragon of tolerance of immigrant culture, and they've even taken that tolerance to such a masochistic, self-flagellating extreme that it has wrecked havoc on the social order.

As for your notion that America has never succeeded in "throwing money at the problem": I suggest you look at the impact of the policies of FDR on the American economy, or the role of the American state sector in pioneering the Internet and the information revolution, as well as a thousand other things.
 
 
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Sep 15, 2012
All you people with theories of cycle, and that Keynesian boom and bust is part of economics, explain whether what we have know is a cycle or a spiral? that is rapidly spinning out of control.

The correct answer is Pragmatists can never solve the problem they created, as according to them everything appears OK at sometime. They would even explain away the economic disasters of their policies with statistical burping.
 
 
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Sep 15, 2012
1 austerity

http://capitalismmagazine.com/2012/02/keynesians-jump-the-gun-on-inflation/
 
 
Sep 15, 2012
Yes, Kuvuplan's link is the best by far (so far). I would like to point out just that Paul Krugman's "Manifesto For Economic Sense" advocates exactly the "countercyclical" economic policy right now.

However, the problem with going into "countercyclical" mode is one of human nature, as presented in a timeless fable about working ants and carefree singing cricket.

I'm not sure we can fix that character flaw in majority of population, but politicians and leaders should know better. But of course they don't, because there are other character flaws that come into play here like envy and/or magical (religious) thinking, partisan decision making and so on.
 
 
Sep 14, 2012
@Therion, yes, Scandinavian countries were highly tolerant a few years ago. However, that has changed radically in the past few years. In fact, a Jewish human rights organization issued a travel advisory warning Jews not to visit Sweden in December, 2010. Islamaphobia is cited as a serious problem, with nearly half of all swedes observing assaults against muslims. Most Finns interviewed this year cited racism is one of the most serious problems in Finland today.

And if higher taxes are one part of a radically different economy, you can't reasonably argue that higher taxes would have any meaningful impact on ours. America has a long history of throwing money at problems and not getting the results we want. Finland and Sweden would never do such a thing. They'd completely re-engineer a broken system.
 
 
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Sep 14, 2012
Drowlord, hard to know how to respond to a post littered with such ignorant misconceptions.

First of all, Sweden's average IQ is nowhere near 20 points higher than the USA's. Nowhere close. It's more like 3 points higher.

Second, in 2009 immigration to Sweden was the highest ever recorded. It's not a xenophobic country and is actually regarded as one of the most politically correct on the planet. For a rant on the multicultural political correctness of Sweden, see here:

http://www.youtube.com/watch?v=zZtc2ma2GEQ

But especially see the twenty or so links at the bottom of the video, which provide objective evidence of exactly this point.

And yes, taxes are only part of the story. So what? My point is that the model that seems to be working best is the Nordic model. The model that seems to be working worst (see the example of the UK) is the austerity model.

Even distribution of wealth is a thing which is good in itself (look at research on Gini coefficient if you don't believe me), and to support stupendous wealth inequality you'd need a compelling argument. You don't have one, because the reality is that countries with the highest taxes on the rich are the world's best economic performers.
 
 
Sep 14, 2012
@Therion, Scandinavian countries have a lot more going for them than high taxes. Their entire economy is carefully structured. While college is free, they limit the number of people who can get various degrees -- as established by the demands for that type of education. They dictate what kind of crops farmers can grow. They dictate what kind of businesses people can start.

I'm not saying that's bad... Just pointing out that high taxes are a tiny part of what they do to make their country better. I'm sure it doesn't hurt that average IQ is nearly 20 points higher than in the USA, and they're a super homogenous, borderline Xenophobic countries. i.e. they were super liberal and tolerant until foreigners (a tiny fraction of their current population) started moving into their country, and now political extremism and racism are regarded as top social problem in both Finland and Sweden.
 
 
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Sep 14, 2012
In Kuvuplan's link, Frankel makes an excellent point about the timing of government intervention and procyclical action, but he overstates it by using anecdotes that do more to betray his politics than accurately portray history. For example, Reagan may have campaigned on lowering the deficit, but he did no such thing in office. Surely Frankel knows that the 1981-82 recession was due to Reagan and Volcker's severe interest rate hikes that were necessary to end the stagflation of the 1970s (when easy money caused inflation, but didn't help the economy). It was a courageous and painful thing that we'll need to do again as soon as growth picks up.
 
 
Sep 14, 2012
For those of you linking / advocating Paul Krugman, I would ask which Paul Krugman, the nobel-winning Stanford professor of the 1990s, or the unrelenting political hack NY Times columnist of the 2000s? As you can see from the article linked below, the two often disagree.

http://www.americanthinker.com/2010/06/paul_krugman_the_selfcontradic.html

 
 
Sep 14, 2012
Here is a book review for _This Time is Different_ that gives a summary:

http://online.wsj.com/article/SB10001424052748703298004574459001609215112.html
 
 
Sep 14, 2012
The voxeu link is basically true, that we should lean towards saving more in boom times and saving less in lean times, but Japan shows that it doesn't always work - Japan now has the highest government debt of any country in history due to repeated stimulus, but the stimulus has not worked.

Reinhart and Rogoff have shown in _This Time is Different_ (sorry, book instead of a link) that financial crises are different from regular recessions. The problem of too much debt can't be solved with more debt. Sooner or later, either the bad debt is wiped out with default or it is inflated away.
 
 
Sep 14, 2012
These links are stupid. This is a difficult and involved question, but the obvious first step is to find a large dataset of economies, choose measurable variables of suspected importance, and run a multiple regression analysis. You don't draw graphs of the US GDP over time and stare at them while ignoring the differing historical context at each point in the graph, or tell anecdotes about the Great Depression, or any of this other crap that the economists in these links are doing. You START with a multiple regression analysis. Anything else is a waste of time.
 
 
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Sep 14, 2012
Here's the best I've seen (in an incredibly entertaining rap, no less):
http://econstories.tv/2011/04/28/fight-of-the-century-music-video/

Keynes' stimulus, intervention, and central planning are always popular both because of our need to "do something" (how can a politician get elected by saying "my plan is to stop trying to help?"), and because it's an excuse for government to grow and throw money around to favored constituents.

Hayek's idea of staying out of the way and letting private free markets heal themselves doesn't go down well with politicians or a naive public who thinks that the government can "fix things."

But you really have to watch the video!
 
 
Sep 14, 2012
It's pretty hard for me to participate when opening this web page in Firefox slows my machine to a crawl, so that I have to wait for it to catch up with my typing, and it takes a minute just to scroll to the bottom of the page. I have four 3GHz 64-bit cores and 16G of RAM and am running Linux. I don't know how people with normal computers can even open this crap-filled page without their poor little boxes bursting into flame.
 
 
 
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