[ctdonath]

who on earth thought austerity was ever a good idea?

Lots of sensible people.

The point of austerity is to stop spending money you don't have on stuff which does not clearly contribute to economic improvement. Every increase in debt must be balanced with a reasonable objective expectation that it will facilitate specific & significant increase in revenue greater than the debt and servicing thereof. If you've spent your paycheck, you buy rice & beans cooked at home instead of swiping the credit card on an expensive dinner out; if your car is out of gas, you borrow just enough to buy just enough get to work (or try walking/biking if at all sensible) instead of filling it up and heading out for an impromptu road trip.

National economics is of course complex and subtle, but the point is basic principles apply: if you don't have the money, don't borrow any unless not doing so will cost you much more, and unless you have a clear plan to pay it off. The Ryan plan (and plans of other austerity backers) is "stop spending money where it won't pay off", as in stop paying people to not work when they could, stop funding obscure/pointless/offensive projects/research/art which wastes money, stop hoping that prolific spending will change for the good.

Wealth is not durable. Spending $1,000,000 to create a $50,000/year job is stupid (and yes, there's a lot of that going on).

[RyanMcGreal]

> the point is basic principles apply

You make the common mistake of assuming macroeconomics is just microeconomics at scale. A national economy isn't just a really big household.

There has been no correlation between public debt ratios and the Great Recession or its recovery. The Recession was not triggered by high debts, it has not affected countries with higher debts more severely than countries with lower debts, and attempts to reduce debts since the Recession have resulted in slower growth and - oops - higher debts.

[laughfactory]

Hmmm, not true. Your simplistic statement falls short of the facts and research. Here's a quote from a very recent paper which refutes (in part) your statement:

"The results of this paper have two important policy implications. First, since the results indicate a positive effect of government investment and a negative effect of government consumption, a reallocation of resources from consumption expenditure to investment expenditure is likely to reduce the growth impeding effects of public spending. Second, as government investment crowds out private investment, US policymakers are faced with a difficult task of finding a combination of public and private investment that minimizes the crowding out effect of public investment. According to the 2009 CBO report [1], all components of government expenditure will continue to grow over time. Therefore, it is imperative to assess the growth effect of government spending, particularly, the effects of key components of government expenditure on growth because the impacts of different types of government expenditure are not the same." Source: http://www.hindawi.com/journals/econ/2012/383812/

Did you catch that? Government consumption (which is, I would argue, the vast majority of government spending these days and more and more each year) impedes growth; Government INVESTMENT (and not the pseudo-investment that Obama is famous to talking about) enhances growth, but empirically also crowds out private investment.

And yes, while it's much larger and more complex, a national economy really kinda sorta IS a really big household. It still faces very real constraints and consequences. It is not God.

[gph1]

Could you lay out the casual mechanism that this study is claiming, and how they make the distinction between govt consumption and investment?

I'd also like to see an empirical example of the crowding out thesis. The idea that public deficits bid up borrowing rates and reduce private sector borrowing opportunities has been pretty thoroughly debunked.

[rtfeldman]

It's actually not sensible to assume that basic principles apply to things that are complex and subtle.

For example, a basic principle for centuries was that metal is too heavy to float, therefore it was clearly too heavy to fly. Simple, basic, and completely wrong - see for example today's airplanes.

This is not to say that the opponents of austerity must have it all figured out, but rather that history has not been kind to ideas of the form "this complex system must surely follow certain common sense principles".

[adolph]

a basic principle for centuries was that metal is too heavy to float, therefore it was clearly too heavy to fly

Do you have any source for this, or are you making it up? For many centuries, the state of the art in metallurgy was not sufficient for making watercraft, much less aircraft. However this did not stop people using the available technology to make such flying things as arrows.

[ctdonath]

I didn't say "common sense principles", I said "basic principles". Most complex systems surely follow certain basic principles.

Apparently "don't spend money you don't have on negative-return investments" isn't common sense.

[gph1]

The idea that the US is running out of money or spending money it doesn't have is a non sequitor. The USG is monetary sovereign that issues it's own currency, and therefore has infinite ability to spend in dollars. Really, it's not even accurate to say the government "has" or "doesn't have" any money. We have an institutional arrangement whereby we cover all spending in excess of taxation by debt issuance, but that is just that--an particular institutional arrangement. The constraint is only inflation--is the USG spending in excess of what the economy's productive capacity can absorb? All available evidence suggests no.

Not to say that waste, corruption, poor capital allocation, etc aren't all legitimate problems. But that's not the question at hand.

[ctdonath]

Don't confuse currency with wealth.

[gph1]

I'm not. The private sector generates wealth. One purpose of the government is to facilitate that wealth creation by running deficits to ensure there is sufficient demand for what our productive output supplies (due to growing capacity, income leakages from savings and trade deficits, distributional inequalities, etc)

[slikts]

Sensible people like Paul Ryan? Now, that's rich.

[ctdonath]

What's wrong with Paul Ryan?

[RyanMcGreal]

You mean aside from the essentially unserious nature of his fiscal proposals, which promise to balance the budget by cutting both spending and revenue in such a way that the numbers don't come anywhere close to adding up?

[ctdonath]

Laffer Curve. Look it up. Even JFK understood it.

[RyanMcGreal]

I'm familiar with the Laffer curve, but I'm not sure what point you're trying to make. Under every incarnation of the Laffer curve that has even a passing acquaintance with empirical data, the Ryan tax cuts will sharply cut overall government revenue. That's because the US is already far to the left of the revenue peak. (Indeed, it was already to the left of the peak during the Reagan tax cuts, which also failed to increase government revenue. There's a reason even George H. W. Bush called it "voodoo economics".)

There is no plausible mechanism by which any versions of the Ryan plan we've seen can actually balance the books. It's nothing more than a generous gift to the country's most affluent taxpayers couched in hand-wavy ideological nonsense.

[ordinary]

Faulty generalization: Paul Ryan is not sensible, so everyone who agrees with him on anything must also be unsensible.

[slikts]

Straw-man much? I just said that it's funny to hold up Paul Ryan as an exemplar of sensibility.

[ordinary]

I should have read the post you replied to, all the way through. My apologies.

[kyllo]

IF that job last longer than 20 years and the salary increases at least in pace with inflation, then why is that so stupid? It's no stupider than a home mortgage lender spending $1,000,000 to create a $5,000/month 30-year mortgage...

[caseysoftware]

The salary increases don't have to keep pace with inflation... they need to keep pace with the interest rate on the $1M which is generally going to be higher than the inflation rate.

Regardless, that's an interesting perspective. My follow up would be "do you think the government is well-informed and future-thinking enough to pick the jobs with 20+ year lifespans?"

Personally, I don't think anyone is. Ten years ago, Microsoft was nearly unbeatable, Google hadn't IPO'd, Facebook didn't exist, and Apple was still a bit player. Ten years from now, who knows what it will look like.

(Granted, that's one field.. but outside of tech, the home construction market was the other boom.)

[kyllo]

Yeah, the thing about investing in job creation is that there is so much churn in the job market--not just in terms of employment rate, but in terms of the jobs themselves being created and destroyed, as we figure out how to use technology to automate them.

And I'd like to point out that just because that hypothetical job being created pays $50,000 per year, doesn't mean it only contributes that amount of value to the economy.

But you certainly wouldn't want to bet on any job that is repetitive (or "concave" to use a michaelochurch-ism) being around longer than a few years, because that work will be distilled into a software program and handed off to a machine sooner or later. It only makes sense to invest in creating jobs that involve creative, "convex" work, which has a smaller chance at a bigger payoff in terms of value creation.

[laughfactory]

If the interest rate on the $1M is 2% then each year the "cost" of the $50,000/yr job is $20,000. So even if we don't factor in inflation (which would certainly change these calculations), it would take more than 33 years to "pay off" the $1M. You'd have to have someone work well over 33 years at $50,000 to recoup much return on your initial investment of $1M. Besides which, as you pointed out, a lot can happen in 33 years...how many jobs remain today that were around 33 years ago? Some of them, certainly, but many of the current crop of high paying jobs have been created in the last 10-20 years by innovation occurring organically in the private sector.

[kyllo]

This is again assuming that the person who fills that $50k/year job contributes exactly $50k/year in value to the economy.

And at some point, when you are talking about investing public funds to create jobs in a period of high unemployment, you need to think of it in terms of subtracting the cost of that person's potential unemployment benefits, medicaid, and other costs that an unemployed person imposes on the public.

So, it's kind of complicated to do a full cost/benefit analysis of this.

[tunesmith]

It stuns me that you think the government doesn't do this. Arpanet, medical research, technological research, the list is endless.

[kyllo]

Yeah, this is all convex, creative/research work with a small chance of a huge payoff in terms of value creation. Companies focused on quarterly earnings won't invest in this sort of R&D type work anymore, so the government has to.

[laughfactory]

This is a great comment. Thank you for leaving it. Very well thought out and concise.

This is one of the biggest problems I have with Obama (and politicians in general): they apply the word "investment" to things that aren't "investments." Have they ever acquainted themselves with the definition of the word? Because the definition of the word is like you said, something which is expected to yield a return. It isn't an "investment" if you're just pouring money into a pit and burning it. Or giving it to people. Or creating or sustaining $50,000/year jobs at the expense of $1,000,000. But "investment" sounds good. So politicians bandy it about. All they're doing is spending.