International Debt Crisis Part III NW Debt Crisis

International Debt Crisis Part III

NW Debt Crisis: United States Readings: • “The Morning After” - Peter G. Peterson • “The Austerity Trap & the Growth Alternative” - Jeff Faux

Debt & Austerity in the US • US government, like all other governments, usually has outstanding debt • Rapid buildup of US government debt (1980 s) occurred due to an increase in borrowing: • Reagan tax cuts, coupled with Reagan depression, reduced growth of govt. taxes • Reagan’s defense buildup, coupled with failure to make equal cuts to social expenditures, were financed with borrowed money

Debt & Austerity in the US cont. • Parallel growth in consumer debt despite Volcker attacks • Viewed as normal since advent of credit cards and consumer credit • Due in part to efforts to defend standard of living • Consumers faced with falling wages and rising unemployment

Peterson: Argued for Austerity • “Our national preference for consumption over investment – the root malady” • “The wage binge of the 1970 s” – real wages stagnant • “Consumption bacchanalia” • “Blind and self-indulgent gusto”

Peterson: His Real Argument • Begins with an overview look at the failures of Reagan era “supply-side” economics • Actually extended “supply-side” rant • Differs from Reaganauts who tended to attack only “excess consumption” in the form of welfare cheaters and government “fatcats” • Peterson broadens attack to everyone; his central focus on “entitlements” for the middleclass

Peterson: Analysis of the Problem Two main ideas – both domestically & internationally: • Too much consumption - Whether from personal income or government programs • Too little savings and investment - Productivity crisis

Peterson: Solutions to the Problem Involves shifting income from consumption to savings and investment: • “Tame” the federal budget deficit, mainly by cutting growth of entitlements • Cut growth of medical care by leaving it to market forces • Increase federal government revenue via consumptionbased taxes: value-added tax • Encourage investment by reducing taxes on savings and investment

Faux: Argued Against Austerity “The Austerity Trap and the Growth Alternative” • Faux’s article a response to Peterson’s extended rant on the necessity of austerity • Arguments echo those in the Third World - Economists argued that the way out of the debt trap is not to impose austerity, but to raise output, consumption, and investment simultaneously

Faux’s Argument Against Austerity • “Root malady is not excessive consumption, but insufficient production” • Rise in consumption as a percentage of GNP was not due to an acceleration in consumption, but do to a slow down in the increase of GNP • Faux argued that Peterson ignored tight money and financial deregulation when explaining high interest rates that undercut investment - Policies brought about by Carter, Reagan, & Volcker

Faux versus Peterson Faux argues that Peterson ignores: • Runaway shops – “production flight” • Casino economy – diversion of money from real investment into financial speculation • Fact that entitlements actually fell as a percentage of government expenditures from 45. 2% to 44. 1%

Faux’s Alternative Strategy Growth instead of austerity: • Managed Growth - “Public-sector led investment strategy” - Use government policy to shift resources from wasteful speculation to real investment - Expand government investment in social infrastructure: growth, new trade policy dealing with access to markets, new social contract between labor and capital • Global Keynesianism - Growth for the world to induce investment