Time to Talk About the Buffett Rule

[creaker]

No. You seem to think government spending creates growth. Every dollar the govt spends is taken from somewhere else where it is likely doing more good. You can make a colorable claim that during certain short periods govt spending may provide a buffer of some kind, but only at the cost of reduced future growth.

Most entitlements get spent as consumer dollars - consumer spending is like 70% of the economy. I think this creates more jobs than some corporation buying a synthetic CDO betting on how someone else's portfolio is going to move. Almost all entitlement dollars handed out this month are sitting on business's balance sheets next month.

The problem is everyone got greedy and worked to pump a lot of borrowed money into the system and we now have an economy dependent on those borrowed dollars and where a huge amount of government revenue is used to pay interest on that debt. The only way to correct this is to shrink the economy which will break a system which requires ever increasing growth. Capitalism functions on boom and bust, I don't think we're going to be able to play the numbers to avoid the bust, although austerity is more of a controlled crash.

[Yossarian]

Most entitlements get spent as consumer dollars - consumer spending is like 70% of the economy. I think this creates more jobs than some corporation buying a synthetic CDO betting on how someone else's portfolio is going to move.

Not me. I will take a system of market based investment decisions over a government distribution system any day. Are there bumps in the road? Sure. But in the long run I think more jobs will come from individual liberty than centralized social entitlemnents. By your logic the USSR should have in fact buried us by now.

[creaker]

Not me. I will take a system of market based investment decisions over a government distribution system any day. Are there bumps in the road? Sure. But in the long run I think more jobs will come from individual liberty than centralized social entitlemnents. By your logic the USSR should have in fact buried us by now.

That's not what I'm saying at all - I'm saying we've dug ourselves into a hole and we can't just dig ourselves out of it.

So when would you end SS, Medicare, etc?

USSR was an oligarchy where a few were profiting from everyone else, that part of it is still there although there was some turnover in the players. And it's where we are now.

[Gregg]

The only way to correct this is to shrink the economy which will break a system which requires ever increasing growth. Capitalism functions on boom and bust, I don't think we're going to be able to play the numbers to avoid the bust, although austerity is more of a controlled crash.

Economies cycle, plain and simple. Government intervention has the potential to moderate the highs and lows, but as often as not either amplifies or extends them. Part of the beauty of capitalism is that the most opportunity exists when we're at the bottom. The same can not be said for government entitlements.

[Yossarian]

That's not what I'm saying at all - I'm saying we've dug ourselves into a hole and we can't just dig ourselves out of it.

Maybe I don't follow you. You said "in an economic model dependent on growth, aren't austerity measures a move in the wrong direction?" I said no, government spending doesn't produce long term growth, it crowds it out. There may be cases where that is an acceptable cost, but in the long term I don't think you get more growth by giving the government control over more of the economy. In what hole does that change?

[creaker]

Maybe I don't follow you. You said "in an economic model dependent on growth, aren't austerity measures a move in the wrong direction?" I said no, government spending doesn't produce long term growth, it crowds it out. There may be cases where that is an acceptable cost, but in the long term I don't think you get more growth by giving the government control over more of the economy. In what hole does that change?

We got growth because the government injected huge amounts of debt into the economy. How do you correct that without seriously impacting the economy?

I'm saying at least in the short term, austerity would choke the amount of consumer dollars out there and affect not only those consumers but those further up the chain as well. Long term, I don't know - are there any examples out there?

[creaker]

Economies cycle, plain and simple. Government intervention has the potential to moderate the highs and lows, but as often as not either amplifies or extends them. Part of the beauty of capitalism is that the most opportunity exists when we're at the bottom. The same can not be said for government entitlements.

So you think collapse is the way to go?

[Gregg]

So you think collapse is the way to go?

If you mean a controlled collapse (aka a contraction) of a relatively significant percentage of the federal government, then yes I do. It's likely to happen on its own if we don't take action. I would much prefer that we retain some control and execute a "soft landing".

Part of the confusion may be the term austerity itself. In the classic sense it involves a reduction in spending and so also the programs/benefits that the spending provided in addition to debt reduction. I agree that deficit reduction is probably not a good idea right now. We need a productive economy that generates revenue to do that and we don't have one. The one advantage to our debt right now is that the interest is at historically low rates so reducing it doesn't have to be the top priority in the short term. After that even cutting spending can be confusing. It might make sense to keep the same budget we have right now, even with some deficit spending included, but reorganize what we spend money on. Infrastructure development spending is an investment. It will help this country get more done and do it better and so will generate revenue in the future. That is a reasonable kind of spending. There are examples of government spending that do not shine so brightly. Those are what needs to be cut, or collapsed, as the case may be.

[Yossarian]

The one advantage to our debt right now is that the interest is at historically low rates so reducing it doesn't have to be the top priority in the short term.

We don't need short term thinking, we need to get things fixed now while we can still make choices. If you wait until rates are a problem it's probably too late. From Ben:

By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis

...

Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, resulting in further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult.

http://www.cnbc.com/id/41491193

[Gregg]

We don't need short term thinking, we need to get things fixed now while we can still make choices. If you wait until rates are a problem it's probably too late.

Exactly.