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Opinions/Editorials Title: Now Isn’t the Time to Cut the Deficit THE clamor to cut the budget deficit is deafening. Blue Dog Democrats, Tea Party Republicans and doomsday economists are calling for immediate action. And the demands for austerity coming from abroad are even louder. Make no mistake: persistent large budget deficits are a significant problem. Government borrowing in good times crowds out private investment and lowers long-run growth. It can also make policy makers unable or unwilling to use adequate fiscal stimulus in times of need: concerns about the deficit limited the size of the stimulus act in 2009 and are a main reason that Congress has refused to take additional measures to cut our painfully high rate of unemployment. And our projected long-run deficits are simply unsustainable. So, the question is not whether we need to reduce our deficit. Of course we do. The question is when. Now is not the time. Unemployment is still near 10 percent in the United States and in Europe. Tax cuts and spending increases stimulate demand and raise output and employment; tax increases and spending cuts have the opposite effect. This is a basic message of macroeconomics and a central feature of public- and private-sector forecasting models. Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession. Some advocates of austerity argue that, contrary to the conventional view, fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially. The study considers a wide range of advanced economies over the last three decades, so it doesn’t put too much weight on unusual episodes or focus on examples supporting particular conclusions. It also breaks new ground by looking specifically at times when governments changed taxes or spending with the aim of reducing deficits. Previous studies looked at summary measures of the budget situation, and likely included cases when strong economic performance caused lower deficits, not the other way around. The recent experience of countries already carrying out austerity measures is consistent with the central finding of the I.M.F. study. Ireland, Greece and Spain have all had rising unemployment after moving to cut deficits. Taking budget actions now that would further increase unemployment would be not only cruel, but also short-sighted. The longer unemployment remains high, the more likely it is to become permanent as workers’ skills deteriorate and they gradually drop out of the labor force. Such a situation would be terrible for both the affected workers and the long-run budget situation. Imagine a patient with a slow-growing tumor who is also recovering from pneumonia. The outcome is likely to be worse if the patient is not given time to recover before undergoing surgery. Waiting has the further benefit of allowing conventional monetary policy to regain its footing. The I.M.F. study found that the negative effects of deliberate deficit cuts are usually softened by reductions in interest rates. But interest rates in most advanced economies are already very low, and the effectiveness of central banks’ other tools, such as quantitative easing — buying certain securities to reduce long- term borrowing costs even further — is highly uncertain. As a result, monetary policy can currently do relatively little to counteract the impact of such deficit cuts. But once the economy has substantially recovered, the Federal Reserve will be ready to raise interest rates. At that point, the Fed could help maintain growth by instead continuing very low rates as the deficit is reduced. Waiting for conventional monetary policy to be back on line is like waiting for the anesthesiologist to arrive before doing surgery. True believers might say we should never wait, because a slow-growing tumor could turn virulent. But we need to think about actual risks. Today, markets are willing to lend to the American government at the lowest 20-year interest rate since 1958. In the crisis of 2008 and 2009, money flowed to the United States because it was seen as the safest spot in the storm. There is no evidence that we have to act immediately. Countries that enjoy the markets’ confidence have another reason to wait. Greece and other troubled nations on the periphery of the euro zone can no longer borrow at affordable rates. They must immediately cut expenditures and raise taxes, despite the terrible toll on employment and output. Countries like the United States, Germany and France can play an essential role as sources of growth and demand for the world economy. Strengthening our economies will help keep the world from slipping into another recession, and allow for continued healing of vulnerable financial markets here and abroad. WHILE immediate fiscal tightening isn’t wise for the United States, we do need to address the deficit. The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal. France’s recent plan to gradually raise its retirement age to 62 from 60 is a classic example of such “backloaded” reduction. President Obama’s proposal to eliminate the Bush tax cuts on high incomes is another: it would raise revenue by only $30 billion in 2011, but by more than $600 billion over the next decade. History shows that well-designed backloaded plans are credible. For example, changes to Social Security eligibility and taxes have been passed years, if not decades, before they took effect. And in an environment like today’s, when Congress has again agreed to pay-as-you-go rules, deviating from planned reforms forces countervailing actions. Such backloaded deficit reduction would not hurt growth in the short run — and could raise it. If uncertainty about future budget policy is harming confidence, as some business leaders suggest, spelling out future spending and tax changes could be helpful. More important, showing that policy makers can come together and make essential decisions about our fiscal challenges would reassure all Americans that our economic future is better than the current grim reality.
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#1. To: A K A Stone (#0)
History shows that well-designed backloaded plans are credible. For example, changes to Social Security eligibility and taxes have been passed years, if not decades, before they took effect. And in an environment like today’s, when Congress has again agreed to pay-as-you-go rules, deviating from planned reforms forces countervailing actions. Such backloaded deficit reduction would not hurt growth in the short run — and could raise it. If uncertainty about future budget policy is harming confidence, as some business leaders suggest, spelling out future spending and tax changes could be helpful. More important, showing that policy makers can come together and make essential decisions about our fiscal challenges would reassure all Americans that our economic future is better than the current grim reality. this reinforces my point to you in the earlier thread.
Title: Obama likely to focus on deficit in next 2 years Source: AP URL Source: http://news.yahoo.com/s/ap/20101024 ... wh/us_obama_how_will_he_govern You no longer support Obama's economic plans to create jobs and bring the economy around?
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