After reading this and spotting the deliberate mistake you might want to see this post:
I find myself bemused by the US budget/Debt Ceiling/Tax revenue crisis, I am no economist, but it seems to me that across the world the right has been calling for austerity, cut and save, be efficient, balance the books, left right and centre, and the left appears to have taken the Keynsian view, that the important thing in an economic downturn is to keep the economy moving and allow economic growth to provide revenue to balance the books.
In Greece Austerity was imposed from without, and hasn’t really worked, rather it seemed to put the Greek economy into a tailspin, and Germany and France seem to have concluded that since austerity didn’t work, a more Keynesian approach might be a good tack, though it does seem that they have wrapped this up somewhat so that the currently unpopular name of Keynes is not attached to their ideas.
In the UK the Conservative led coalition has also taken an austerity, cuts and savings led approach, but has been confronted with an economy bumping along with very little growth. There are distinct signs that more Keynes like measures are in the pipeline.
It struck me listening to reporting on the US Debt ‘argument’ that the US is in a not dissimilar position to Greece, the ‘debt ceiling’ under discussion is $14.3 trillion Dollars which is equal to the US Gross Domestic Product, which is famously the largest in the world. I remembered that the reporting on the Greece debt crisis claimed that the amount Greece owed was $300 billion, roughly the size of the Greek Gross Domestic Product, and that this was a major crisis.
Now there seems to me to be a conundrum here, and it is most obvious when comparing the US Economy with the worlds second largest economy, China, which will for all intents and purposes be the same size as the US economy if current growth trends continue, in about 5 years.
US GDP $14.7 Trillion (World No 1)
US Debt $14.3 Trillion (World No 1) (99% GDP)
US Foreign Reserves $140.6 Billion (World 17th)
China GDP $10 Trillion (World 2nd)
China Debt $406.6 Billion (World 22nd) (7% GDP)
China Foreign Reserves. $3.05 trillion (World no 1)
This does not bode well, it rather suggests that the US economy is out of control, (As are a number of other western economies all with debts equal to or greater than GDP, UK = 400% GDP)
The nature of the conundrum would seem to me to be twofold, Firstly how did we get to a situation where entire nations owe more than they earn in an entire year, and how do those nations pay it back.
As to the how, I think that this might well come from a misunderstanding of Keynes ideas. Now as I have said I am not an economist, but from A Level maths lessons many years ago I remember Keynes’s concept being explained to me like this: Say you owe Fred £10 which you don’t have, but you know Joe wants a bike and is willing to pay £30 for one, and you also know Alfie has a bike he is willing to sell for £10, and Peter knows you won’t rip him off and would willingly lend you £10 provided you pay 10% interest.
So you borrow the £10 from Peter, (Doubling your debt) buy the bike off Alfie for £10, sell it to Joe for £30, Pay Peter £11 adding the £1 interest to the £10 you borrowed, pay off Fred £11 adding interest to the £10 you owe him, leaving you with £8 profit.
The problem seems to have been that this solution to a crisis has been used repeatedly even when there wasn’t a crisis, with the profit being spent on each occasion, rather than being invested against future difficulties. Granted I suspect the original problem was the debt accrued fighting WW II, possibly compounded by the third world debt crisis in the 80’s and 90’s during which huge sums were written off.
To me the reason Keynes’s ideas are currently unpopular is because too often, having paid back Peter and Fred, the next step has been to spend the £8 profit, borrow £20 from Peter to by a bigger and better bike which Alfie has paid a little more for, paying back the lone spending the profit, borrowing £40 from Peter, buying a better Bike selling it to Alfie, spending the profit, . . . . Well you get the idea.
The problem now of course is that the US needs to borrow a fifth of the worlds GDP to cover it’s own debt, before it can even think about buying a better bike to sell, never mind finding someone with enough money to lend, in order to buy what is now a bike with more bells and whistles than the New York, London and Berlin Philharmonic Orchestras Combined, with the Hale thrown in for good measure.
There is a solution to this, but it is one that none of the western democracies seem willing to confront, and that is Tax. Tax it seems could easily be the downfall of democracy. No political party in any democracy can seem to see itself getting elected, if it says what seems to be obvious, someone has to pay more tax.
Now it is unfortunately true that 95% of the worlds wealth is in the hands of less than 5% of the people. Regular readers of this blog will know that I have noted elsewhere that taxing rich people/corporations, who after all have the most to spare is problematic. If one nation increases it’s top rates of tax too much, the rich move their money elsewhere, where the tax man doesn’t want so much of it. So nation states are very reluctant to overtax the rich. Unfortunately, this means they have to tax the poor. Who don’t have so much to spare, and in a democracy have a habit of voting out governments who remind them of how poor they are by taking a bit more of what little they have off them. So governments are forced back into trying to tackle the debt by further borrowing.
The only solution to this would be international agreements about the top rates of Tax, creating a level playing field, or put another way reducing the number of places that rich people could hide their money from the tax man.
There could be other advantages to this, since funds could be invested by governments into areas of the world experiencing extreme poverty, which I have discussed elsewhere on this blog.
Any which way The worlds largest debtor economies have to confront this soon, since they are for the most part democracies, and the fastest growing major economy is not only far more frugal and based on a sounder financial footing, but it is also an authoritarian state.
The role of the Tea Party in this interests me since I recently discovered that Rupert Murdoch’s Fox News gives them free air time, and he seems constitutionally opposed to the idea of Taxation in general, as do the other major contributors to Tea party funds the Koch brothers, reputedly the third richest people in the world. And the Tea Party seems to be the major sticking block in the discussions over the US Debt, opposing increased Taxation.
Perhaps these immensely rich people who’s perspectives are rather particularly international in outlook have seen the writing on the wall, and their funding of the Tea Party is simply an attempt to stave off the inevitable.
As I write this I do not know what the outcome of the US Congress vote on the US budget is or will be, and I’m not going to look because then I might have to rewrite this and its now too long for me to want to revise it too much. However it interests me that the two economics commentators I heard discussing the issue on British TV late last evening (Thurs 29-7-11) both thought that if the US is not able to solve the Budget issue that it would most likely be the Republicans who took the fall far it in the eyes of the voters.
I don’t know if they are right, but I can but hope, the only way I can see out of this mess is a stronger tax base, drawn from those who can afford it most.