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Understand and shudder!

January 29, 2013 in Smart thinking

The best explanation of the American debt ceiling I have yet seen sent to me by a readers.

And it makes you wonder, how do politicians and economists miss this?

If you managed your household budget like the US managed the national budget

2 responses to Understand and shudder!

  1. Hi Bertie, these analogies try to simplify the problem but in doing so totally miss the point. Unfortunately people fall for it.

    On the household budget level your spending is my income so, if I don’t spend you don’t have an income and the government gets less in taxes. Thus, to stimulate the economy the government is the agency that has to step in and spend to boost the economy and to do so it has to borrow. If the government, however, decides to reduce debt at this time who steps in to stimulate the economy. What these deficit hawks and analogies are suggesting will create a full blown depression.

    If you accept that the job of government, in the economic sphere, is to harmonize (smooth out the booms and busts) the economy then in downturns they need to stimulate the economy by spending and encouraging spending and do the reverse in the good times. Unfortunately, in the US and other western countries, tax cuts to encourage spending in 2003 were not reversed once the economy got going. Also two unfunded wars were paid for with debt instead of taxes. This would have paid down the debt to provide adequately for the situation we are in now with large government debt and the need to borrow more. Fortunately with interest rates at or near zero this is not a problem. It is sad that the GOP and GW did not read the right passages in their bibles when it really mattered.

  2. Chris great to hear from you again. Hope you enjoyed your Super Bowl. You offer the classic Keynsian argument. Don’t read my post as pro republican – you are right they are where Labour was under Foot (a great pun don’t you think?!). What is clear is that you will have to cut social spending and tax and stimulate. Schröder in Germany showed the way and paid the price – but I don’t think he complains. I think we now have enough evidence that government’s efforts to harmonise must be done very carefully, because in trying to smooth out too much, the next crisis is created . There I am 100% with Taleb.

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