Fiscal Irresponsibility vs. Fiscal Austerity
December 13, 2010
The strategy to generate growth on the two sides of the Atlantic could not be any more different. The U.S. government is cutting taxes and raising government debt - hoping that increased spending will generate growth. European governments on the other hand are raising taxes, tightening their belts and actively lowering debt levels. This raises the question of whether fiscal irresponsibility or fiscal austerity is the right strategy to generate growth. There are strong arguments for and against fiscal irresponsibility. The critics argue that Americans will be paying heavily for the deficit later while supporters say that deficit financed public investment can create a “virtuous” circle whereby public investment spurs growth, in turn improving the budget outlook. The fiscal austerity agenda risks creating a “vicious” circle in which austerity slows growth, necessitating further austerity.
This argument is as much about politics as it is about economics, but I think Winston Churchill said it best -
“For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
What do you think?
Posted in us government tax
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December 13th, 2010 at 2:48 pm
I think we are heading for hard times either way. Excessive debt financed growth is like a dog chasing his tail. What happens when all the tax receipts go for interest payments. I wont deny that is a long time away if you wont deny that it will be a problem before that happens. Or wont it be a problem ? You tell me. Thnks i love your writing.
December 14th, 2010 at 11:16 am
Hi,
if i may choose, i prefer euro approach rather than US in the long term. Though arguably more austerity might needed in case of euro, every people must in one time of their life feel less prosper for the benefit of a whole nation. As layman on economic policy, to me US approach increasing debts to increase growth is like parent who gives their educated but greedy children money when it should be them who gives their parent money
December 14th, 2010 at 2:51 pm
If we study a little bit about economic history of the crisis, we can find some clues.
Sweden in 1990s, after crisis, Swedish government did cut the government spending as much as they could and they let all of the bad companies go to bankrupt.
Latin America countries, after the crisis, the governments fought the inflation by cutting the government spending. Asia crisis in 1998, most of the nation did the same way as cutting spending and stabilize the currencies.
Compare to today economy crisis, it is not so difficult to say who is trying to do the right thing.
December 19th, 2010 at 4:03 pm
The US government is out of touch with the American people. Money that the people receive(tax breaks) will not go to more spending. The money will be “spent” paying for personal debt from borrowing from equity or credit card(s) used to live the past year or more. This(money) will go to banks and they are not turning it back but using it to further their (stock holders) profit. The QE2 will also go to banks and lending institutions and they have a track record of keeping it for their investments. So the tax payer, once again will foot the bill for big business and keep falling downward. It is clear from the leverage change that government is not interested in the people as much as it is interested in preserving the status qou in Washington. If the present administration(Obama) had even a slight interest in the well being of the United States theQE2 would be used to stop the bleed from foreclosure. The idea that increasing the monetary volume(via bond sales) of big banks and wall street will have a trickle down effect ranks right up there with”when pigs fly”.