Transcript Document

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 (1980s)
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 1970s” – 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