The world economy is heading towards a black hole unless bold action taken
economist.com
economist.com
Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008. (Banking is more concentrated and national balance sheets are a mess from the bailouts)
Please tell us how that works in practice rather than in theory. I really, really want to know how you just 'reboot' the financial system without massive disruption to retail banking or the payments system. How do you 're'capitalize a new bank? If you just mean create new banks, who is running these banks? I mean, I'd like to have seen a complete reboot of the system as well, but it looks like the sort of thing that is much easier said than actually done. If you're going to mention Sweden, provide specifics of how long it took and how much capital was involved.
It's possible there will be much more suffering as a consequence for not acting now - by letting the core problem persist.
It could have major implications that last for decades versus a few years of hardship.
Most complex problems can't be fixed from constantly patching the top surface. They need to be broken down and rebuilt into something better.
Don't feel bad that no one else believes it, heh. Throughout history, the world has been literally insane -- this is just another example of an insane view that's spread into popular culture. ("The system is too big to fail" / "Postponing the disaster is better, because the pain will be distributed over a longer period, rather than shocking us all at once" / whatever other crazy, impossible thing.)
We may, individually feel the need to break it all down. But most people don't care or understand. Not until bread cost $250 a loaf. Then the herd stomps it's feet and waves it hands screaming, "OMG what happened? Whose to blame?".
Then something might get done.
The bigger problems are the bankers themselves. Bankers NEVER change unless they have no choice. And our government (the US) had that chance, to force them in a different direction. For one moment Bush and Obama had the chance to really change things. They didn't.
Actually Bush had two chances to shake things up; 9/11 was his other. For one moment, he had the attention of the entire planet. Everyone. And what did he say? "SHOP".
There will be massive disruption in any case. It can come in the format of recapitalization (Iceland) or inflation due to inflating their insolvency away (Latin America).
> How do you 're'capitalize a new bank?
OP meant recapitalize the failed banks. Short version:
1. Fire the board of directors.
2. Fire the management. (The question here is how many levels: At least the C-level execs, but probably another level below that.)
The above people have FUBAR'd the bank in the first place. Leaving them in place and expecting a different result is insanity.
3. Wipe out the shareholders.
4. Haircut the bondholders. Subordinated debt is probably 100% wiped out, preferred is probably 50%.
5. Inject treasury capital, and subordinate the formerly preferred. Nobody gets ahead of the treasury.
Total time is probably 1 week for the BoA sized guys. Declare a bank holiday if you wish, like 1933. Guys smaller than BoA are a weekend, as evidenced by FDIC takeovers.
6. Prepare for steps 1-5 for all the idiots that depended on the bonds from this bank as Tier 1 capital because they thought this bank was too big to fail. The system will be better without those idiots too.
Clearly the ones currently running the bank are unqualified, which is why it is insolvent. Leaving them in place and expecting a different outcome is not sensible.
But directly to the point you ask: Yes, I believe there are many candidates who will perform better and for less money. (In the words of Charles de Gaulle: The cemeteries of the world are full of indispensable men.) Probably a fair fraction are inside the organization already, but if I were the regulator in charge, I would cross fertilize and take folks from outside the organization because internal allegiances are probably in the way of a thorough reorg.
There are plenty of people that could have run the banks. Sheila Blair perhaps? I'd be okay with Elizabeth Warren. Hell I'd even take Jim Cramer at this point.
You're telling me the government could have rebooted BofA, AIG, Wells Fargo, CitiGroup and Chase (to name just the top 5 - http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program#P...) in the space of a week or two. I would love if that were possible, but I don't see how it is. Proposals like this were debated at some length back in 2008, after all, and I distinctly remember them being decried as Communism, for understandable reasons.
Understandable that they are actually communist, or understandable that bankers and regulators would say any old bullshit to at least barely legitimize to the public massive transfers of wealth into their pockets?
> I distinctly remember them being decried as Communism, for
> understandable reasons.
No, they were not. The proposals were about how to avoid doing the above list.
Firing the management and BoD would take less than a day. Wiping out the shareholders and bondholders would also take less than a day. Injecting new capital would take less than a day.
All of those could be done on the same day. I'm alloting a week in order to find/promote the correct caretaker CEO.
In Sweden, the government demanded steep losses from equity holders before it took over a large part of the financial system (unlike US officials, the Swedish government officials were not afraid to use their superior bargaining position to get an excellent deal for the government). The upfront cost for recapitalization was 4% of GDP, the net cost in the end was less than 2% of GDP (based on different computation methods some even say 0%). Following asset sales in 1995, the Bank Support Authority went into a dormant role in 1996, 4 years after the crisis.
http://www.nytimes.com/2008/09/23/business/worldbusiness/23k...
Japan handled things differently and ended up with debt totaling 200% of GDP. See this excellent YouTube video from economist Richard Koo that explains the Japanese experience:
Economic/political discussions on HN are painful because people who are capable of generating meaningful insights when the topic is technical are reduced to wishful thinking and trotting out tired, simplistic misrepresentations of economics.
Let the country's biggest banks become insolvent, then "reboot" them in a week? When you start proposing that the world's largest economy model itself on theoretical notions only tested in a country 3% it's size, ideologically oriented in a completely different direction, and founded on a radically different social contract, then you are not arguing anymore.
It's not an argument, in the sense of debate and intellectual exchange, it's dogma.
> The idea that we can just lift one bit of regulatory policy from
> there, apply it to our financial sector, and call our problem solved
> is not just misguided, it's flat-out magical thinking.
This is from a Wikipedia article you could have found in 30 seconds; if you had, perhaps you would have changed your mind about posting, saving us all the pain of knowing that someone on HN is capable of posting such a glib, worthless comment:
Several thousand newly homeless and jobless Argentines found work as cartoneros, or cardboard collectors. The 2003 estimation of 30,000 to 40,000 people scavenged the streets for cardboard to eke out a living by selling it to recycling plants. This method accounts for only one of many ways of coping in a country that at the time suffered from an unemployment rate soaring at nearly 25%.
_Twenty-five-fucking-percent and people selling cardboard for a living_
Is this the example you crazy people aspire to when you pine about your pure free markets and how the economy should have been allowed to undergo massive correction?
[1] http://www.nytimes.com/2011/09/02/opinion/argentinas-turnaro...
That opinion piece talks about how Argentina recovered from the crisis, and it definitely does not say that defaulting on their debt was the right step. If anything, it is a resounding endorsement for the Obama plan and a rebuke of austerity in times of crisis.
Argentina has regained its prosperity partly out of dumb luck: a commodity price boom has vastly benefitted this soy, corn and wheat producer.
The government intervened to keep the value of its currency low, which boosts local industry by making Argentina’s exports cheaper abroad while keeping foreign imports expensive.
It then taxed those imports and exports, using the money to pay for a New Deal-like public works binge, increasing government spending to 25 percent of G.D.P. today from 14 percent in 2003.
Why have Argentines embraced bigger government? In part because the preceding era showed how poorly austerity measures — the sort now being pushed by conservatives in the United States — promote growth. In the late 1990s, Argentina cut government spending drastically on the order of its lenders at the International Monetary Fund.
For one thing, extreme cost-cutting during a stagnant economic period will only inhibit growth. And government spending to promote local industry, pro-job infrastructure programs and unemployment benefits does not turn a country into a kind of Soviet parody. It puts money in the pockets of average citizens, who then spend it and spur the economy.
Did you read craig's short comment? It talks about devaluation, not default. Now, it so happens that Argentina chose to pay just what it owed the IMF and effectively get out of "the world credit establishment" with a big, unpaid debt. Guess what? No Argentinean government could have set in motion state intervention/"stimuli" of any kind had most of its resources been devoted to pay an unbearable foreign debt. (Debt interests, in fact.) As you surely know, even though Argentina's debt is proportionally [2] smaller than the that of the US, the payback rates it gets are prohibitive, unlike America's 3%.
Just for clarity, what was your point? That Argentina would have been better off without default? Without devaluation? Both? Let me reiterate, there is nothing stupid about thinking otherwise...
[1] http://en.wikipedia.org/wiki/Argentine_peso#Peso_convertible...
[2] https://www.cia.gov/library/publications/the-world-factbook/...
crag suggested that the mere fact that Argentina recovered from such a staggering blow to its economy was indicative of something -- the implication, it seems, is that the fact of recovery is enough to warrant severe measures such as default.
That's stupid, for the reasons I laid out above.
You, however, seem to be supporting the original reasoning by employing an appeal to authority and suggesting that certain credible thinkers agree with crag's premise. However the one example you provided did not bear evidence of that. I don't know what else your point is -- I don't care to debate Argentina except that you seem to be using it as an example of something.
I don't know about "what if" and the hypothetical situation in which Argentina did not default. I know what did happen --default, followed by an IMF-imposed austerity program, led to 50% poverty. It's only when people got behind so-called "big government" measures that they actually started to see real recovery.
You see, Argentina's unemployment [1] and poverty [2] rates soared during Menem's worship-the-system 90's. These rates happened to peak, respectively, in 2001 and 2002, basically around the time Argentina defaulted, among many other measures.
Now, with a discipline as complex as economics, given all the variables floating around, it is hard to conclude rigorously that defaulting contributed to reversing this trend, but it sure is harder to claim the opposite!
[1] http://www.wolframalpha.com/input/?i=argentina+unemployment+...
[2] http://www.wolframalpha.com/input/?i=argentina+poverty+rate+...
Not only that, you've conceded the only point I had about it:
it is hard to conclude rigorously that defaulting contributed to reversing this trend
You're having a conversation with yourself at this point. Please follow more closely the points being made before following any compulsion to chime in.
What a stupid thing to say. Have you ever read about the currency crisis?
This is from a Wikipedia article you could have found in 30 seconds [...]
I don't give a fuck about Argentina for the purposes of this conversation [...]
[...] follow more closely the points being made before following any compulsion to chime in.
Edit: For the record, you have conceded in the points of substance, particularly considering the minutiae you are addressing and all that you are surprisingly leaving out. You stated earlier:
I know what did happen --default, followed by an IMF-imposed austerity program, led to 50% poverty.
This is what you have been in this thread: an arrogant, cocky lawyer who gets his most vital piece of evidence hilariously backwards.
The fact is that this was a thread about how Argentina's crisis provides evidence supporting the positive benefits of allowing economic collapse. The initial post was intensely stupid in that it reduced the complex effects of economic collapse to a simple if-this-then-that causation. The only relevant point is causation, which I argued was not the case, and which you conceded -- despite you neither having made the original point, nor any attempt whatsoever to defend it.
You don't seem to be arguing the initial point, or the counter point. You only want to talk about Argentina, without taking a moment to understand the context in which it was mentioned. So congratulations on nailing me for reversing the order of the austerity program and the default -- great job, I feel really dumb for failing to correctly order a sequence of events related to a tangential point.
Here's what you have been:
Two guys are arguing on the street, and during that argument one of the guys mentions the name of a sports team. A drunk, walking by, happens to be a fan of that team. Despite not knowing in what context that team was mentioned, or whether it was mentioned positively or negatively, the drunk gets in a fight with one of the men. And not necessarily the one who uttered the team's name.
You're the drunk.
I was born and raised in Argentina, though this should not matter, nor does it need to be "disclosed". I knew what the WolframAlpha plots would look like because I have lived the situation. Look, Argentina has been an exceptional country for many reasons (mostly bad), and it's not a too-big-to-fail state such as the US or Italy, so clearly its experiences need not apply to other countries.
In that respect, I do not agree with crag's suggestion that anything applicable to Argentina in 2002 could be applied to the rest of the lot in 2011. The thing is, though, that instead of raising your valid points about simplistic causation, etc., you mistakenly pointed (and in a snarky way) to Argentina's "currency crisis", i.e., devaluation, then to default, in turn linking them to social distress. Please convince yourself: in Argentina things got way better after default, devaluation and big spending, which took place at the same time. Argentina's real currency collapse can be found here [1] (with relatively little unemployment and poverty, by the way). There was no IMF-imposed austerity after the default: most of that austerity was recommended in order to meet debt obligations up to 2002, and leaving that cycle was the whole point of the default! Even though Kirchner was smart enough to pay the IMF debt, following the steps of Russia and Brazil, just to get them off his back, there was no state austerity after the default.
As for my first link, I thought (mistakenly) you implied that Argentina had gotten worse since the default, and I provided a recent article with a snappy reply. Not very constructive, I admit and concede.
Beer in hand, I salute you!
So congratulations on nailing me for reversing the order of the austerity program and the default -- great job, I feel really dumb for failing to correctly order a sequence of events related to a tangential point.
Well, it's not a minor point to this thread, though this thread sure is, I agree, completely inconsequential in absolute terms: reversing the order means that the culprit could be the austerity measures, not the fuck-the-system default, which happened right before the first derivative changed signs!
Let me repeat that you have referred almost interchangeably to default, devaluation and an austerity program, which is really confusing. The first two are easily marked on a timeline: December 2001 and January 2002. By now I don't know what austerity measures you refer to, but again all this would take you very far from your statements linking default and/or devaluation and poverty. So, however tangential this thread is, it is based on the core of your original statements. Currency crisis and/or default did not, in any conceivable way, lead to the inception of cardboard collectors, nor to the 50% poverty rate. These issues had been building up steadily for a decade by the time the default happened, and this is not an interpretation or factoid.
As an aside (not countering any point!) be aware that for countries like Argentina big-government initiatives and fuck-the-system approaches go almost hand in hand, because comply-with-the-system plans means that you have to put aside a lot of your GDP to pay outrageous debt interests (forget about capital), leaving you little money to spread. I mean, look at the US debt ceiling fight the world witnessed last August. With a fraction of that spectacle any Third World country would have been left paying >30% annual rates, while the US is not (yet?) susceptible to speculation and still pays its cozy 3%. Fair or not, don't expect countries to behave the same "serious" measures under such a varied array of conditions. [No references for all this data. Feel free to grill me with factoids.]
As a final note, a few comments on:
Have you ever read about the Argentine crisis, or is your knowledge limited to Wolfram Alpha's graphs and Googleable factoids?
Have you? Should it ever matter in a debate? I'm presenting facts based on Wolfram Alpha, and you on Wikipedia. Why should we consider them factoids and not facts? Because we don't dig all the way for primary sources? We are both supporting our points with factoids, then. So? Should we support them with "reason alone"? Incidentally and ironically, you seem to have never read about Argentinean economics in depth: nobody with the lightest acquaintance of contemporary Argentinean economics could have honestly been unaware that poverty was, for almost a decade, sharply on the rise up to the default, and make the basic mistake of saying "look! default led to poverty". But boy, do you have a hard time accusing others!
Such a response has only been politically infeasible in the US because the financial industry has such a stranglehold on US political discourse. (See Confidence Men, and in particular its description of the resistance Obama faced when he tried to do this kind of thing with Citigroup.)
While the greater point may be true, it does have the benefit of hindsight to a certain degree.
At the same time - after seeing the effects of Lehman's collapse, the regulators really didn't have any other choice than saving those banks. The option of not acting really wasn't there.
The financial collapse was caused when other banks realized how bad Lehman's balance sheet was. Because their own balance sheets were also bad and they deduced all the other banks out there are probably in just as much trouble.
So banks stopped lending to each other and that's what caused the collapse.
But those circumstances wouldn't have changed if we bailed out Lehman. Because the realization would still have been the same.
Beyond a few thousand job losses (likely temporary, and about 0.01% of the US economy).
- Credit markets seized up because no one could tell who
was insolvent.
- Massive outflow of foreign capital from the US as
investors realized what a mess the US financial system
must be in.
I recall reading (think this was in Too Big To Fail) that the deciding powers were afraid that if there was another Lehman, cash would stop coming out of the ATM machines. This is what prompted AIG and a few of the other shotgun marriages.
You're ignoring the money market here. I just looked up some numbers, and Forrester research peged the amount of deposits at FDIC insured banks at $6.9 trillion at the end of 2007 (http://www.forrester.com/rb/Research/industry_essential_us_r..., although the number of insured dollars is probably a fair bit lower than that due to limits on the size of insurable deposits), while the Institutional Money Market Funds Association gives $3.6 trillion in money market funds. Money market funds are marketed as being equivalent to bank deposits (down to the ability to write checks against them) and many retail investors don't understand that they aren't insured.
The problem is a lack of boldness. Bold regulation on banks and insurance companies is necessary. If we're going to do bailouts, we had better make sure the same misbehaviors can't happen again.
In the U.S., we're fucking up my trying to fix failing institutions in-place. No management changes. No meaningful regulations. Often the laws are written by the industry they're intended to police (cf. health insurance). That's a horrible strategy. We need to become outright liberal again and double down on boldness, not play around with this compromising corporate-friendly chickenshit nonsense.
If we'd just cleared the pipes by letting the banks fail, recapitalizing new banks, and basically rebooting the financial system, we'd be much further along.
This sounds like a quote by Herbert Hoover. Contrary to history's view of him (which is intensely negative) he was a very intelligent and probably a good-hearted man. He, however, believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong.
Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008.
That is true. The bailouts were a necessary evil, but the way they were handled was ridiculous. Top management at the bailed-out banks should have been fired, and real regulation should have been put in place to prevent the behaviors that made the bailouts necessary.
What ultimately is destroying the U.S. is not the conduct around our banking system. That's bad, I'll give you that. It's the two astronomically expensive wars we are fighting that are unlikely to end any time soon.
> This sounds like a quote by Herbert Hoover.
The current approach by Ben Bernanke of printing money is a reaction to the Great Depression, in which the money supply contracted. There seems to be little attention paid to the Hoover phase before it, in which many institutions failed. This purged many of the weak institution, and probably more than a few not-so-weak ones.
Purging weak institutions before making cheap money available to the banks would have been a helluva lot more sensible than the Great Giveaway that occurred.
Hoover wasn't evil as you point out, but nor was he an ideologue who refused to choose the best policy because of prior beliefs. Believing that story line makes us blind to learning from his failings to better ourselves. To wit, his great vice wasn't lack of compassion or intellectual arrogance; it was simply a... lack of boldness.
What about bold regulation on the regulators and the politicians? You remember them - they thought that subprime mortgages were a good idea, that everyone should own a house, so any bank that wouldn't play ball didn't get to play.
You remember Fannie and Freddie - they lied about the fraction of the market that was subprime, so everyone's risk calculations were wrong.
> Often the laws are written by the industry they're intended to police (cf. health insurance).
Actually, they're always written by the relevant industry.
> That's a horrible strategy.
However, like gravity, it's how things are. Any plan that assumes otherwise is doomed.
> This sounds like a quote by Herbert Hoover. Contrary to history's view of him (which is intensely negative) he was a very intelligent and probably a good-hearted man. He, however, believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong.
And, you're completely wrong. Hoover tried stimulus after stimulus; he dramatically increased spending. FDR actually campaigned against the spending and changed course upon taking office.
Both Hoover and FDR believed that the great depression was caused by excess production, so they both tried to restrict it. FDR didn't give up until it became apparent that an "arsenal of democracy" had to actually produce lots of stuff.
This "war on production" is now credited with putting the "Great" in "Great Depression", that is, with making it last as long as it did.
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonge...
However, his stimulus programs were tiny compared to the size of the hole. FDR's programs got progressively bigger over time, until he blinked in 1937, but were still quite small compared to what was required. When WWII came along is when things got serious.
Here's a nice table:
http://www.presidency.ucsb.edu/data/budget.php
That's the basic Keynesian view as I understand it. I find it credible, but the fact is that I don't actually know that much about economics. One thing that I am quite sure of, however, is that nearly no one else talking does either. Or if they do then they usually have got several axes to grind and are selective in their data, disingenuous in their arguments, or too emotional to be trusted.
Wow, I'm getting pretty cynical about the whole thing.
We've been bailing out too-big-to(should)-fail, crony corporations ever since Chrysler in 1979. And they die slow deaths regardless of how many taxpayer dollars line their executives' "golden parachutes". Let the strongest survive and the weakest find new careers. That's how you get "management changes".
[Hoover] believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong.
Well, if he believed that, he had a funny way of showing it. Maybe he didn't intervene as much as FDR, but he was a lot closer to FDR than Coolidge: http://www.eurekalert.org/pub_releases/2009-08/uoc--hps08190...
No, bold actions by financial instrument designers, sellers and buyers created much of the current mess. Agreed on the crony capitalism and ad hoc intervention, and the real shame is that the cowboys who got us here did great out of the deal, but let's lay the blame appropriately.
-- Andrew Mellon, Secretary of the Treasury, 1929
Once he had become the most hated president in American history, Herbert Hoover wrote caustically of advisers like Mellon whose "prediction that it would right itself was not based on any studies he did or any evidence he presented."
Krugman was right to call this the return of Depression Economics. Note the conservative obsession with debt and US credit worthiness at a time US borrowing costs are FALLING to about 1% over 30 years (!!!), a figure at which there is basically no cost to pursuing fiscal stimulus and at which the spending pays off immediately in greater tax revenues and less spending on social services for the unemployed. Run the numbers yourself:
http://www.project-syndicate.org/commentary/delong118/Englis...
On the technical stuff, the excesses are met with really knowledgeable rebuttal, driving up the denominator. People are afraid of embarrassment, so they write more carefully, driving down the numerator. The dynamic drives the overall ratio to something like one.
On economics, everyone is really sure the other guy is crazy. They make posts that drive up the numerator, as that's the only way to get heard, and drive down the denominator, as they must address the other guy, whether they know anything about the matter or not. The average blows out hyperbolically -- if there's a limit, the signal / noise drops too low for even the craziest people before that limit is approached.
It's kind of remarkable to see how quickly those ratios go to their logical endpoints.
Jokes aside, you have a good point.
In the U.S. taxes are around 24% GDP which is quite low relative to the rest of the industrialized world and quite low relative to our recent past (50 years). Raising taxes will counteract any hyper inflationary forces. Increasing the debt for the U.S., given that the borrowing rate is ridiculously low and tax rates are similarly low, will not lead to hyper inflation. Inflation is a not a problem in the U.S. right now.
That's why per capita tax receipts have stayed fairly consistent over time even though the tax rate has fluctuated: http://www.angrybearblog.com/2007/09/comparing-presidents-re...
Don't get me wrong. We could and should raise taxes to the highest levels we can. But there's a threshold where it becomes cheaper for rich people to hide their money than it is for them to pay higher tax rates. When we cross that threshold we see tax revenue start to drop.
So while I'm in favor of raising taxes I don't think we can raise taxes to the point where it would get us out of this mess.
How high? And how is it a straw man? A straw man is a false argument that someone uses to make another person's position seem weak in a debate. I don't see that happening here. (Except maybe in your post. You're making it seem like the person you're responding to is in favor of doubling or tripling the tax rate or something, when in reality he probably supports a moderate increase.)
> That's why per capita tax receipts have stayed fairly consistent over time . . .
Your link shows the opposite. Per capita tax receipts have grown 250% over the last sixty years according to that chart.
> I don't think we can raise taxes to the point where it would get us out of this mess
How high do you think that is? Right now receipts are well south of 20% of GDP. Currently revenue would have to be doubled, but outlays typically increase and revenues decrease during a recession. If you look at the non-recession tax rates that would be needed to close that gap in, e.g., the Bush years, it would have only taken a 5-10% increase, which hardly seems as outrageous as you're making it out to be.
I suspect it's around where they were during the Clinton presidency. But I honestly don't know. And if we were making policy rationally instead of trying to demonize one side or the other what we'd be doing is trying to find that out.
As for the term Straw Man what you're saying when you says "raise taxes" is "The answer is simple". You're giving the impression that the other person just doesn't want to look at the obvious answer. My point was the tax argument is false (because we can't realistically raise taxes that high) and hence the argument that our debt is a serious problem is not a weak one.
> Your link shows the opposite. Per capita tax receipts have grown 250% over the last sixty years according to that chart.
Consistent is relative I'll grant you that. But the point is when the top tax rate was around 90% tax receipts were lower. So in comparison to our wildly fluctuating tax policy the receipts have been relatively consistent.
> How high do you think that is? Right now receipts are well south of 20% of GDP. Currently revenue would have to be doubled, but outlays typically increase and revenues decrease during a recession. If you look at the non-recession tax rates that would be needed to close that gap in, e.g., the Bush years, it would have only taken a 5-10% increase, which hardly seems as outrageous as you're making it out to be
Right now you're just making up numbers so I can't really debate your point. 5-10% of what? Income tax? Capital Gains? If you combine National + Average State debt for each American the number comes out to around $150,000 per tax payer with interest. That is not something that is going to be solved with a 5-10% increase on anyone.
http://paul.kedrosky.com/archives/2011/07/tax-burdens-around...
First you're forgetting those countries don't have state taxes. For example, the top tax rate in California is close to 40% when you combine both State and Federal. Plus you have some cities that have income tax.
Second you're forgetting loop holes. Again the point I made above is U.S. citizens paid less in taxes when the U.S. tax rates were higher.
So again I can't say you're absolutely wrong. But you did over simplify (and you also ignored the point made in the very post you were supposedly replying to)
I responded to your post in another comment.
http://economix.blogs.nytimes.com/2009/04/08/how-much-americ...
I'm genuinely curious about this, not trying to stir up a giant political debate.
The people who make the argument you mentioned are wrong. If lower taxes always lead to greater economic growth then the optimal tax burden would be 0%. But this would mean there is no government and we'd be in an anarchy. Does anyone really think an anarchy is the optimal way to grow an economy?
No, I'm not, and it's a bit disrespectful of you to say so. You could have verified what I was saying with a mere sixty seconds of fact-checking on your own.
I was talking about receipts, just like earlier in the paragraph. What tax it comes from really does not matter for the purposes of this discussion. Receipts would have had to increase somewhere on the order of 10-20% during the Bush years for that period to have a balanced budget. That's according to this chart (http://www.heritage.org/budgetchartbook/growth-federal-spend...). Now, this is from a conservative think-tank, so take that with whatever grains of salt you will, but this is consistent with spending charts I have seen on non-partisan sites.
I don't mean to flame but I based my statement on facts not a desire to disrespect you. Namely the Total U.S. tax revenue which was $2.1trillion. 10% of that is $210 billion which is less than half the interest on our national debt
(btw - The U.S. deficit for 2011 was $1.5 trillion)
For the record I'm not trying to be holier than thou. I've absolutely guesstimated (aka "made up") numbers in the heat of the moment. But when someone called me on it I didn't try to be indignant about it
Even the estimate that is most generous to your position is more than sufficient to support my argument. It could be twice again that amount (40%) and still not reach the levels of unworkability you posited in your original post, considering a number of other countries are under burdens more than 60 or more percent above the United States'. You can pick all the nits in the world but that fact remains.
If we managed to increase that by 40% that would generate an extra $840 billion per year.
(Keep in mind that's massively generous because that would mean a 40% increase in everyone's taxes not just the top earners)
The total debt right now is $14.7 trillion. Even the most conservative CBO estimates had us adding $700 billion per year to the debt (usdebtclock.org) and those were very conservative estimates.
So your 40% increase doesn't even deal with the deficit. Much less the debt or the unfunded liabilities.
And that's assuming you could get that. My original point was people will subvert the tax code when tax rates get high enough to justify accountants and lawyers to do so. That's why a 90% tax rate didn't produce dramatically more revenue per capita.
Erm... I'd like to see your definition of "emerging country" because it seems completely different to the accepted definition for either of those words
The current tax burden as a percent of GDP in the U.S. is low by U.S. standards of the last 50 years and quite low relative to other industrialized nations.
The so called fiscal problem we have is easily fixable. Raising taxes is a viable strategy.
http://paul.kedrosky.com/archives/2011/07/tax-burdens-around...
You're missing the fact that there are significant cultural differences between Germans and Americans. Germans seem to consider this tax rate a reasonable price to pay in order to maintain their desired social contract. Americans (especially the wealthier ones) would decide that they are getting screwed by a corrupt system and would start looking for a way to get out of paying. Funny thing is that the Germans are starting to act like Americans when it comes to paying to bail out Greeks, Italians, etc. so I suspect it boils down to Germans trusting other Germans more than Americans trust other Americans.
The US debt to GDP ratio is rapidly approaching 100%
http://www.usgovernmentspending.com/federal_debt_chart.html
Once it hits 100% it's only a short walk to becoming a country not a lot unlike Greece:
http://www.tradingeconomics.com/greece/government-debt-to-gd...
2) Take a look at Japan: http://www.tradingeconomics.com/japan/government-debt-to-gdp
220% of GDP and no one is worrying. Why? It's bond yield is so low: http://www.tradingeconomics.com/japan/government-bond-yield (unlike Greece: http://www.tradingeconomics.com/greece/government-bond-yield)
The US incidentally has a bond yield roughly double Japan http://www.tradingeconomics.com/united-states/government-bon... Even though it has a much lower debt to GDP, it is paying almost the same interest per GDP!
And that's the funny thing about solvency. As long as investors give you low interest rates, all is well. If they decide you will be insolvent, bond rates rise, resulting in a self-fulfilling prophesy where you actually become insolvent.
Solvency is of course inversely correlated to debt to GDP ratio, but there are tons of other actions at work.
But the one point where I think you're clearly wrong is using interest rates or lack of inflation as measurement sticks. As long as the U.S. holds the reserve currency we have the whole world trying to prevent our currency from collapsing. That means giving us whatever interest rate we want and pegging their currency to ours.
I suspect we'd see a major collapse in the dollar if the world decided to abandon it as the reserve currency.
PS: I still think we should cut government spending by around 30% AND remove the home mortgage tax deduction but both of those need to be slow changes or they are going to cause a great deal of harm.
The only thing that the tax deduction did was to raise the price of houses.
I wish I could but I can't, not in context of a HN thread comment. I'd be happy to recommend some books if you are interested.
Someday we must pay that borrowed money back. I'd rather not borrow any more.
No thanks. We would be better off to head straight through the black hole, full speed ahead. It will be painful for a few years but we'll come through the other side with cleaner balance sheets and sustainable government budgets.
"In America the Republicans are guilty of outrageous obstructionism and misleading simplification, while Mr Obama has favoured class warfare over fiscal leadership."
I suppose if you made money, didn't live in a house, and didn't spend your money in any way, your tax rate would be 50% in France. This just isn't the case for the average consumer.
The worst part about that article is that the meatiest statement 'That could change if Congress came to its senses, passed Barack Obama’s jobs plan and agreed on a medium-term deficit-reduction deal by November' is dead on, but delivered in such a clumsy manner it's almost a throwaway piece.
For instance, the same print issue as this 'nonsensical raving' has a much more detailed summary of the euro crisis in the Briefings section if you're looking for the gory details alluded to in the leader[1].
Here are two quotes taken from the article:
1) "That could change if Congress came to its senses, passed Barack Obama’s jobs plan and agreed on a medium-term deficit-reduction deal by November." - Author favors Obama's plan and says it will fix the problem.
2)"while Mr Obama has favoured class warfare over fiscal leadership." - Author refers to the exact same policy, but now calls it favoured class warfare.
This has a ton of link bate and zero information anyone actually cares about.
The jobs plan doesn't even have enough Democratic support to pass the Senate, so the likelihood of it making it through both houses is nil. It's more of a political plan than an economic one.
I also think that we have limited capability to make expedient investments in infrastructure with a positive ROI. Take a look at the Columbia River Crossing project between Oregon and Washington states - six years after project inception, the final environmental impact study still hasn't been released. Construction would start in 2013 at the earliest and is estimated to take 5-7 years. Time lines like that are common with large infrastructure projects in the US.
http://blogmaverick.com/2011/08/08/what-business-is-wall-str...
These traders on Wall Street have little interest in creating capital for the companies that stem innovation. Their main incentive is profit, even if it means making money off economic downswings. We need to put them back on the proper track via taxes or a complete restructuring of the capital gains system.
"If Democrats and Republicans fail to hash out a compromise on the deficit, draconian spending cuts will follow in 2013. For all the tirades against the Europeans, America’s economy risks being pushed into recession by its own fiscal policy—and by the fact that both parties are more interested in positioning themselves for the 2012 elections than in reaching the compromises needed to steer away from that hazardous course."
Says it all right there.
I'm not entirely sure I understand the distinction being made between illiquidity and insolvency here, could someone please explain it? It seems to me that if you are in a state in which a high enough interest rate on your debt will put you in a death spiral from which you cannot feasibly recover, then your problem is bigger than liquidity.
This "bold action" depends on politicians. -> Forget about it!
Strap in, change is opportunity, get ready for an exciting ride.
The guys who make money, the rich, however, certainly will. These recessions and all are always a pretty good opportunity to make more money.
Look, it's shitty that it's going to hurt a lot of people. I wish it didn't. But, the fact that it will doesn't mean that it should hurt me.
Maybe, just maybe, things are going to go really, really badly this time around. Maybe.
It is better to gravely recognize the scope of the problem, assemble facts regarding the situation, and then to move to positively affect the situation on all levels, from globally to locally.
The bold action that is needed is to not panic, but to take measured steps regardless of ideology and re-election chances.
I wish I was in a position to do more than work hard, invest, and not panic.
On the other, it's perhaps the pre-eminent mouthpiece for the ruling Anglo-American elite, and it's comforting that they're sounding the alarms to what's happening. I think it's too little too late, but I genuinely hope that people and policymakers hear them.
Because this is really bad, folks. Really, really bad. It's pretty clear the dominoes that will fall: Greece fails, setting off markets and destroying banks across the continent, causing Spain to fail, doing the same, causing Italy, Belgium, maybe even France to fail. Who knows what after that. The EU's demise will signal the financial collapse of an economy larger than the United States; it's already either at the brink or already in a new recession, and this will be the deathblow. The quick succession of collapses, happening all within the span of a month or two, reverberate throughout the entire world, throwing the USA back into a second, possibly harsher recession than the first we have yet to recover from.
The only other solution is converting the European Union into a fiscal union. On the face of it this is implausible: you'd be asking Germans, who in their self imagination see themselves as pure as snow, to pony up hundreds of billions of dollars to subsidize what they see as the lavish lifestyles of lazy unproductive Mediterranean types. Even if you could form some political consensus to do this, though, it's not even clear that politicians could coordinate the solution in time to cut off the collapse. Effectively consolidating dozens of countries into the same fiscal union isn't a change you can implement by sheer willpower; it'd be a herculean task even with years of preparation.
And, stateside, any attempt to counteract or prepare for this tidal wave is simply doomed because of our ridiculously broken institutions. One side has the ability to co-operate and try to fix the situation, but because of how our government is set up all the incentives on their side are to actively sabotage the economy--regardless of causes, if it does badly, the party of the current President will be blamed.
Because people (Americans, Germans, Greeks, Chinese) are all idiots, from the man on the street to the upper echelons of power.
Absent that, they look as rhetorical as anyone, if somewhat better written.
Also, I really disagree that this crisis has evolved from idiocy. It's more a matter of misaligned incentives. Many of the people who have caused this mess have already profited handsomely from it.
I agree that the crisis is a matter of misaligned incentives, but I include politicians and bureaucrats from pretty much every country in the set of those who have directly misaligned incentives (i.e. not just indirectly misaligned by campaign contributions from wealthy bankers), so I have very little faith in the ability of regulation to solve the problem.
I don't doubt the complexity of our current economic situation, but the way our government is currently run by lobbyists who naturally have their own myopic view, I think it would be more an accident than on purpose that our economy gets better.
What I find interesting is how an impending Chinese squeeze would affect American markets. Their economy has been steadily dropping, but with all eyes on Europe no one has really looked into it.