The problem everywhere is simple: governments can't tax special interest groups. Taxes have to be raised on everybody. But government can and does benefit special interest groups. So increasing taxes (which are general or potentially so) engenders huge opposition from everybody; increasing benefits has diluted costs for everybody but concentrated benefits for a few. Hence lobby groups and PACs. Nobody rises up in arms about a special benefit generously awarded by the government to a few. By all means increase the pension/build a new airport/privide a nice subsidy to a small group! But I don't want to pay for it. Especially if it can be funded by borrowing.
Look at the chart below. This shows Federal government taxes and expenditure as a percent of GDP. The gap is long standing. Ironically, the only surplus was under a Democratic President, Bill Clinton. The ballooning in expenditure and the fall in revenue in 2008, 09 and 10 is typical of recession. Normally as the recovery progresses, the tax percentage rises, expenditures fall. But this cycle has been different, because it's been so sluggish, so far. Hideously expensive wars don't help (the Afghan war costs $2 billion a week).
This photo of a tea party protester sums it up.
It's enough to make you weep.
Yet a too rapid rise now in taxes and cut in expenditures will plunge the US back into recession. The Greek experience, where fiscal tightening resulted in a worse budget outcome after the economy collapsed is instructive. If you maintain that the US is unique ("American exceptionalism") and nothing can be learnt from a bunch of dodgy cheese-paring monkey-wrench foreigners, look what happened in 1937, when a new Republican House and Senate tightened fiscal policy on the argument that a balanced budget would "restore confidence". There was a very deep recession.
At the moment, the US consumer is being supported by massive subventions from government at all levels. Net net, US individuals are receiving more from the government than they are paying to it. It would be a mistake to savagely reverse that position too quickly.
Yes, something needs to be done about the deficits -- but not quite yet. Perhaps the best option is to temporarily suspend indexation of benefits such as old age pensions and unemployment benefits. And do something about health costs: the US spends twice as much as Oz does as a percentage of GDP on health with inferior outcomes.
Ross Gittins' words are worth repeating:
To boil it down, the reason Greece is in so much trouble is that every Greek wanted a government that did all the expensive things governments do, but none wanted to pay tax.
Greece's politicians did not have the courage to tell their people that, in the end, you cannot have one without the other.
The Greek government ran budget deficits for year after year, racking up more and more government debt, eventually doing dodgy deals to disguise the amount of that debt until - surprise, surprise - the day of reckoning arrived.
The major advanced economies ... have not had the courage to tell their voters that government benefits have to be paid with higher taxes.Greece is now in the hands of its bank manager and - another surprise - he is not inclined to be gentle or reasonable.
Replace "Greece" with "most western countries" and you get the picture. He goes on to say:
The ideal way to get on top of your debts is to trade your way out. Keep the income coming in, hold down your expenses and use the difference to pay down the principal. What makes it hard is the continuing big interest payments you have to meet before you can reduce the principal. Once your bankers lose faith in you, they may well increase the interest rate you are paying to cover their heightened risk.
For governments it is even harder. If they start from a position of annual deficit, they have to slash spending and raise taxes just to return the budget to balance and so stop adding to the principal. To get the budget into surplus - and so have money to reduce the principal - they have to cut spending and raise taxes even further.
But the more governments cut their spending and raise taxes, the more they slow the growth of their economies. And the more slowly their economies grow, the more slowly their tax revenue grows and the higher is their spending on dole payments, making it that much harder to get back to surplus.
The trouble with bank managers is that when finally they lose patience with you, they become quite unreasonable, imposing requirements and restrictions that actually make it harder for you to repay your debt. And when the ''bank manager'' takes the form of a herd of anonymous traders in global financial markets, their actions can be destructive and even self-defeating.
Something needs to be done about the deficits over the long term. Markets (if they believe you, and they don't believe the Greeks) will accept a long-term soultion. It's a depressing solution: restrained spending and rising taxes (as a percentage of GDP) for a decade. What's more, the old panacea which hid increasing middle class impoverishment over the last 30 years -- borrow on the back of rising asset prices -- is kaputt.
However, America is exceptional in at least one way. Its debt is in the global currency, US dollars. Its bond market is the widest and deepst in the world. So it, perhaps alone in the world's developed economies, can probably afford one more year of pump-priming. After that, the deluge.
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