Cut or Spend?

[Marko]

Seems to me that Europeans are going 'Spend spend spend!' whilst our governments are going 'cut cut cut!'

And the reverse appears to be happening in America.

Id be interested to hear what people have to think is the best option for their government (bearing in mind, not everyone can run a surplus/deficit)

Some points..

America can run a much higher deficit thanks to the dollar as a world reserve currency than other nations.

Denmark, Britain, Sweden & Norway can devalue their currencies (or milder quantitive easing) as they are outside the eurozone.

The weaker eurozone currencies can STILL (I know )borrow at lower rates thanks to (they shall remain nameless) more responsible Eurozone nations.

The Chinese 'government' have complete control over the private economy.

What should your government do?

[gunnut]

Cut...cut...cut...in fact, slash like OJ.

[crooks]

Spending cuts have already been introduced here through an austerity program - the deficit is still gigantic. The big senseless move has been bank guarantees and cash injections, to 'protect' this sector to the detriment of the real economy, particularly into Anglo-Irish bank - this has become a quagmire, with billions being pumped in every single month (I'm not exxagerating, google it!) to a zombie bank with no future...it's reverse socialism, subsidy for the rich and the middle and bottom paying the bill.

I'd end these subsidies, collapse Anglo-Irish bank, finish NAMA then remove the guarantee and let the other banks sink or swim on their own merits, as they've lied about their condition every time they've been asked and need to be judged on viability by markets. The government should protect jobs by introducing a German style job saving plan (pay 30% of wages of employess to be axed, allowing the employer to keep the manpower cheaper, the person to stay in employment with their wage intact, and the state to not have to pay full social welfare). Introduce a 3% wealth tax for the higher bands and drastically scale back tax credits, but axe PRSI (a social contribution scheme) for employers who create a new job, and exempt new enterprises from corporation tax in the first two years. Make it easier to hire (and fire) employess on a short term basis, continue to invest in broadband and green energy, make spending cuts in defence, procurement (lower building costs, renegotiate contracts) and administration.

Social welfare should not be cut any further, nor should children's allowance, as these are the most stimulative parts of goverment spending (people taking them can't afford to save, so it goes straight back into the economy). Health is inefficient, and should see swinging cuts, though not to capacity. Cap public sector pay, reduce the level of hours doctors can spend on private patients in public hospitals, ring-fence education with commitments to increase spending at the first opportunity. Introduce a volunteer system for the unemployed, where helping out in the community earns a slight bonus, while keeping local areas cleaner and better maintained (first thing to be cut in a reccession is garden and waste disposal spending). Continue the current agreement with the trade union movement on cuts, but revise towards more savings and cuts if economy heads towards double-dip.

New transparency and bank reform laws to reduce the level of toxic or risky debt a bank can hold, mandate increased cash reserves and examine mergers very carefully, as they reduce competition in the longer run. Work to get the deficit back towards 3% of GDP by 2014 as per Eurozone requirements. Devolve more power to local councils and grand them a tax-raising mechanism to lower the burden of debt on central government, while bringing the government back towards local accountability.

If the government follows a framework like that the economy will continue to improve, but Minister Lenihan probably won't be subscribing to such naughty ideas as the above anytime soon.

[Marko]

Thanks crooks, but I think your response for far too detailed for anyone that doesn't live in Ireland.
Ireland was one of the countries I was thinking about when I posted this question. Ireland seem to have crucified themselves upon the cross of austerity... but it doesn't seem to have benefited them at all... Should this be a warning to fiscal hawks elsewhere?

[Marko]

Cut...cut...cut...in fact, slash like OJ.

sounds sensible gunnut, but if the Peoples democatic republic of california stop buying those cheap chinese goods, then those poor chinese cant buy those nice fast German cars... and if Germany (for Germany read Europe) cant sell stuff....

[gunnut]

Cut...cut...cut...in fact, slash like OJ.

sounds sensible gunnut, but if the Peoples democatic republic of california stop buying those cheap chinese goods, then those poor chinese cant buy those nice fast German cars... and if Germany (for Germany read Europe) cant sell stuff....

You confuse consumer spending with government spending. I want to cut government spending because it's always less efficient than consumer spending. Our spending programs here favor political payoffs and kickbacks, rather than something that might actually help the people. Put money back into the hands of folks who actually worked for it. They will figure out how best, and the most efficient way, to spend it. This will increase productivity overall.

[crooks]

Thanks crooks, but I think your response for far too detailed for anyone that doesn't live in Ireland.
Ireland was one of the countries I was thinking about when I posted this question. Ireland seem to have crucified themselves upon the cross of austerity... but it doesn't seem to have benefited them at all... Should this be a warning to fiscal hawks elsewhere?

Yep, it's entirely Ireland related (I figured you were saying 'go local'), but the template doesn't change that much, and the ideas are implimentable in any other place - In an international sense I'm a broad Keynesian, social democratic, and pro-stimulus during downturns if it's feasible (it's not here, with Ireland's current debt levels).

For international example I see the Cameron cuts as ideological, needlessly deep and more about shock and awe than actually solving the problems Britain faces. Christine Lagarde is doing an excellent job in France.

[Marko]

Sorry Crooks, fair comment I guess. What is this NAMA business? I saw a protest last year in Dublin about it... National Assests something or other?

Gunnut..
Im not confusing the too, I know government spending is inefficient, but Keynesians would argue that in the absence of private spending its required.
It would be better the private sector would spluge, but in these times businesses are understandably holding back... That only leaves government spending.

[gunnut]

Gunnut..
Im not confusing the too, I know government spending is inefficient, but Keynesians would argue that in the absence of private spending its required.
It would be better the private sector would spluge, but in these times businesses are understandably holding back... That only leaves government spending.

Government doesn't make anything, therefore the money government spends is either borrowed from the future (gotta pay it back sometime) or extracted from the private sector right now (further depressing the economy).

Government spending distorts the market. It provides a temporary boost. Then it wears off and the market corrects itself. Government is not bigger than the market. It can pretend to be. But in the end, the market wins.

Here's a good example. Remember that "cash for clunkers" deal last year when Obama was trying to give a boost to the auto industry? Basically the government spend a few billion dollars to entice people to buy cars. The old cars, or clunkers, will be destroyed.

There were a few unintended consequences from this program:

1. Demand was shifted from the future to the present. People moved up their purchasing schedule to take advantage of this program. So instead of buying a car in 2010, they bought in 2009. If you had just bought a new car in 2009, how likely are you to buy another new car in 2010? We saw a huge drop in new car purchases right after the program ended.

2. Used car market was distorted. This program demanded that old "clunkers" be destroyed. The reason being these were presumed to be inefficient cars that polluted a lot. The truth was many of these cars were not that bad, just old. People wanted shiny new cars. Normally people trade in their old cars toward the purchase of a new one. Now these cars were destroyed. The trade in value was supplanted by government money. New car buyers are better off. However there's a large used car market that was worse off. Parts market was also distorted due to the destruction of these older cars. It became more expensive to fix old cars due to lack of salvagable parts.

3. The program was to help "American" auto industry to move the compact car inventory. But who makes the best compact and sub compact cars? Japanese and Korean. So people who were looking to buy small cars went to the Japanese and Korean route. What type of American cars sold? Large trucks and SUVs. How did those buyers get government money to do that? They traded their old trucks and SUVs for new ones. Thanks to advance in technology, large vehicles get much better mileage now than a few years ago. People went to the biggest car or truck they could get away with while still qualifying for government money.

Yeah, government spending was a shining success in kick starting the market.

[astralis]

gunnut,

a few economic misconceptions here.

Government doesn't make anything, therefore the money government spends is either borrowed from the future (gotta pay it back sometime) or extracted from the private sector right now (further depressing the economy).

the point of borrowing is to leverage other people's capabilities to increase your own. the pay-off is determined by what the money does in the meantime-- ie borrowing money to buy toys might be foolish, but borrowing it to better your education might not be.

Government spending distorts the market. It provides a temporary boost. Then it wears off and the market corrects itself.

see the above example. getting an education, for instance, provides far more than just a temporary boost. in terms of real life economic examples, the HUGE increase in government spending throughout the 30s and 40s drove unemployment way down (inefficient use of resources), created a vast national highway system to replace the inefficient local mix of private/public road network, and sent millions of farm-boys to school (which they could never have afforded themselves), creating a far more efficient/effective workforce for the next thirty-forty years.

the fact that the US economy didn't crash (as all of the neoclassicists thought it would) following WWII (instead, growing at record rates) is proof that the effect need not be temporary.

this shows the difference between wise government spending and poor government spending (see late-90s japan), which indeed have the problems you outline. wise government spending not only bolsters the present-day economy but sets the stage for the future.

[crooks]

Sorry Crooks, fair comment I guess. What is this NAMA business? I saw a protest last year in Dublin about it... National Assests something or other?

NAMA is the National Asset Management Agency. Essentially it's a kind of 'filter' group through which the government takes the banks toxic loans, gives them a 'haircut' (cut in the value from what they're worth on paper, and what they're worth in reality, sometimes as much as 75% reductions) and then sells the now correctly-valued loans on. The aim is to remove the liabilities from the banks sheets and allow them to stabilise.

It sounds good, but in reality the loans are being generously haircutted to reemburse the many developers and bankers, the evaluation is shady, and the results are mixed at best, and the billpayer (the Irish taxpayer) is getting ripped off. Already we've seen that NAMA has gone from supposedly being profitable at the end (4 bn euro according to Minister Lenihan), to taking a clear loss of an unspecified amount, that will be substantial.

It's a stupid program, I think, and really straightjackets the future.

[paintgun]

Fortunately as one of the developing nations, we managed to grow through the crisis
With one key factor, strong domestic consumption
And not surprisingly there are also countries that escaped the crisis, through strong domestic consumption

One would say spending helps boost domestic consumption which in turn will stimulate the economy. More money flowing into the public, more money for consumption, more sales and transactions, growth in economy
And cuts are for the countries who need to trim their budget and their deficit, it is more fiscal related, in bad economic situation, governments have less room to spend and tighter budget possibilities, hence the cut

Cuts and spending are different treatments, it very much depends on the situation of each country is facing.
The Eurozone countries are on austerities with their budgets, but what about the economy as a whole? What measures has been taken to promote and facilitate growth?

[gunnut]

gunnut,

a few economic misconceptions here.

the point of borrowing is to leverage other people's capabilities to increase your own. the pay-off is determined by what the money does in the meantime-- ie borrowing money to buy toys might be foolish, but borrowing it to better your education might not be.

"Might" is the key word. Borrowing money for a degree in underwater basket weaving is probably not the best investment. Not getting a degree but geting a job working as a mechanic is better.

see the above example. getting an education, for instance, provides far more than just a temporary boost. in terms of real life economic examples, the HUGE increase in government spending throughout the 30s and 40s drove unemployment way down (inefficient use of resources), created a vast national highway system to replace the inefficient local mix of private/public road network, and sent millions of farm-boys to school (which they could never have afforded themselves), creating a far more efficient/effective workforce for the next thirty-forty years.

World War 2 pulled us out of the depression.

National highway system, notice, is not a group specific spending plan. We all can use the highway.

the fact that the US economy didn't crash (as all of the neoclassicists thought it would) following WWII (instead, growing at record rates) is proof that the effect need not be temporary.

this shows the difference between wise government spending and poor government spending (see late-90s japan), which indeed have the problems you outline. wise government spending not only bolsters the present-day economy but sets the stage for the future.

Again, the key word here is "wise."

Wise is something I will not label the current spending pattern as.

[astralis]

gunnut,

"Might" is the key word. Borrowing money for a degree in underwater basket weaving is probably not the best investment. Not getting a degree but geting a job working as a mechanic is better.

the point remains, there are more than a few cases where both in personal and on a wider level, borrowing is economically beneficial in both the short and long term.

World War 2 pulled us out of the depression.

WW2 was the impetus-- but of what? for truly vast government stimulus, dwarfing FDR's previous half-hearted keynesian efforts. to put it in perspective, WW2 gov't spending as a proportion of the economy would approximately equal $7-8 trillion dollars today.

Again, the key word here is "wise."

Wise is something I will not label the current spending pattern as.

sure, that's fine (i personally would have liked a bigger stimulus, with a much larger proportion for infrastructure).

but anyway, the point of the above is just to show 1.) not all borrowing is bad, and 2.) government spending does not necessarily just provide a temporary boost, and 3.) not all distortion is bad.

here's an interesting case for you that proves both of our points. post-WW2 japan was advised by the americans to avoid government intervention and allow the "natural" development of agriculture, which was believed to be a japanese comparative advantage. the japanese ignored the US advice and following the korean war, heavily favored the development of japanese heavy industry and electronics, both with heavy government subsidies and a protectionist trade regime.

this turned japan in a world electronic powerhouse by the late 60s and early 70s, and an economic superpower by the 80s. however, attempts to use massive government stimulus in agriculture failed in the 80s (creating an inefficient cottage industry) and failed on a larger scale in the 90s.

so there's truth in both of our statements.

[Marko]

Government doesn't make anything, therefore the money government spends is either borrowed from the future (gotta pay it back sometime) or extracted from the private sector right now (further depressing the economy).

Government spending distorts the market. It provides a temporary boost. Then it wears off and the market corrects itself. Government is not bigger than the market. It can pretend to be. But in the end, the market wins.

I am a small government kinda person (not big society though!), so I broadly agree that its private sector is preferential to public. I dont share your contempt of government spending though - you say its a distortion, but its a simple reality that the government makes up a large chunk of the economy. In Britian its slightly over 50%, which is far too big I agree (72% in Northern Ireland!). It needs to be slimmed, but sucking all that money out of the economy is dangerous. It could be pumped back in through tax breaks I guess, but then the welfare bill goes up so the government needs to borrow more. It never should have been allowed to grow so big, and an awful lot of the private sector companies exist solely to service the public sector, so by slashing the public sector will cause bankrupcies in the private sector.

Its a tricky business slimming the public sector, its gotta be done slowly and with care. Our coalition government is on a deficit slashing crusade, but I fear they may be moving to fast.