Monday, May 07, 2012

Austerity sucks

I've been reading about austerity imposed by the IMF and World Bank for many years. Lately it has been imposed upon European countries, and they don't like it! Just like Jamaica didn't like it. In Feb 2010 I wrote:

"The devastating economic effects of the 1973 oil embargo hurt even more in poor countries like Haiti and Jamaica, which had to import all their oil. Watch the excellent documentary Life and Debt to learn more about Jamaica's debt crisis that ensued after the embargo."

But I did not mention the austerity imposed upon Jamaica by the IMF and World Bank after the crisis. Watch the documentary to learn more. Also in that post I quoted a Wikipedia article about the 1973 oil embargo without linking to it (I just updated it with the link).

Europeans have decided that austerity is not working, while Republicans in America think the US govt should practice some austerity. Actually I think the US govt should practice some austerity, especially in the area of "defense" spending. But not right now, at a time when laying off soldiers would hurt the economy further. It's an election year!

I remember Iraq in the 70s, when the govt in Baghdad was benefiting from the spike in oil prices. The regime enriched themselves, of course, but they also spent money on infrastructure and education. My father benefited directly from that policy. I give credit to President Ahmed Hassan al Bakr. But the Baath party was a socialist party, after all, and it wasn't the first socialist party to gain power. The Iraqi Communist Party, led by Abdul Karim Qasim, gained power in the 50s. There was great progress in Iraq in those days. I wish Iraq could be like that again.

PS: The Wiki article to which I linked about Ahmed Hassan al Bakr says: "During his rule, Iraq was blossoming; high economic growth due to high oil international oil prices strengthened Iraq's role in the Arab world and increased the people's Standard_of_living"


anan said...

Mojo, defense spending is being cut sharply. To around 2.5% of GDP. Compared to approximately 10% of GDP in the 1960s under John F Kennedy and 6% in the 1980s under Ronald Reagan.

In other words the US is projected to reduce defense spending to one fortieth of total spending.

Is that really too much in your view?

The reason public spending in the US is skyrocketing out of control is because of health care spending.

"austerity is not working"
The problem is that the world (and their own citizens) are refusing to lend money to some European governments. How can a government spend money if they can't find anyone willing to lend it to them?

There is a perception that some European governments are lying when they say they will repay the money they borrow. How would you change this perception?

Mojo, what would you do differently if you were running Greece, Portugal, Ireland, Spain or Italy?


It is misleading to say that the IMF and World Bank force austerity. Usually only broke governments approach them for help, when everyone else in the world (including their own citizens) are refusing to lend them any money.

If the IMF and World Bank didn't lend them money, governments would be forced to impose a lot more austerity. IMF and World Bank lending reduce short term austerity.


Hollande campaigned like a racist idiot. His election was opposed by Merkel in Germany and the large majority of the international community. Hollande wants to sharply cut all lending by the French government and EU to all the countries that are in trouble.

Hollande's policies would force far deeper spending cuts and tax increases on what he and probably many French citizens see as irresponsible countries. Something that is deeply popular in France as it is in the US and many other countries.

Hollande also calls for sharply increasing public spending, hiring large numbers of new bureaucrats, without proposing any serious way to pay for it.

One of Hollande's ideas is to tax rich people at 75%. Which is insane because many rich people would drop their French citizenship in favor of other countries, causing tax revenues to decline

Fortunately I believe Hollande intentionally and serially lied throughout his campaign and plans to do little of what he promised.

Iraqi Mojo said...

Defense spending is 2.5% of US GDP? That's huge, considering US GDP.

The more important figure (to me) is the percentage of the federal budget that goes to defense spending. In 2011 it was 19%:

"During FY 2011, the federal government spent $3.60 trillion on a budget or cash basis, up 4% vs. FY 2010 spending of $3.46 trillion and up 20% versus FY2008 spend of $2.97 trillion. Major categories of FY 2011 spending included: Medicare & Medicaid ($835B or 24%), Social Security ($725B or 20%), Defense Department ($700B or 19%), non-defense discretionary ($646B or 19%), other ($465B or 12%) and interest ($227B or 6%)."

Iraqi Mojo said...

"Mojo, what would you do differently if you were running Greece, Portugal, Ireland, Spain or Italy?"

I would want sovereignty over the banking system in the country I would run. Each country should have its own central bank, and they should set monetary policy for themselves. Greece might want to devalue their currency, Krugman argues. Some quantitative easing, perhaps. Can't do that with the Euro.

Iraqi Mojo said...

I don't know much about the French candidates. I thought Le Pen is the racist one.

Anyway, we shall see what the new French president does. I did hear that he wants to raise taxes on the rich to 75%. What is the tax rate now on the rich in France?

You say this "is insane because many rich people would drop their French citizenship in favor of other countries" but I doubt it if the tax rate is currently 70%.

I'm sure the rich are already hiding their money in Swiss and Cayman banks, just like Mitt Romney is.

Iraqi Mojo said...

I wonder if they shift half of that defense spending (10% of the budget) to education, what would be the effect on GDP in the long term?

anan said...

Mojo, the number of soldiers in the US military is being sharply reduced.

The US federal government spends about 25% of GDP. Total federal plus state spending is about 38% of GDP. Defense is being cut to about 10% of the federal budget, or about 6% of the combined federal plus state budget. That is already happening.

This is based on projections that the economy hits full employment again.

It is important to differentiate between symptoms (current defense budget and global security risk premium) and root causes.

The root causes of large global defense budgets are:
1) Takfiri extremists
2) organized crime (which are enabled by chaos, failing states and autocratic governments)
3) crazies in North Korea
4) risks of free democratic transitions in China and Russia

Probably in that order. These challenges force global defense spending up and increase global risk premiums. Increased global risk premiums in turn slow down global technological innovation, reduce global living standards and increase global poverty.

The goal of global defense, international and foreign aid spending should be to phase out global security threats on a self sustaining basis so that gradually global defense spending becomes obsolete.

If you really want to reduce global defense spending, then focus on ending global security threats. If you do that, defense budgets will automatically get slashed.

BTW, many very successful countries have large defense budgets:
-South Korea
-historically Switzerland although less so now

I don't have a problem with deep cuts in the size of the US military. I would reduce the number of soldiers below current proposals. Increase the proportion of NCOs and officers. Increase the salaries and education of soldiers (maximize the number of enlisted with PhDs and Masters degrees, and with high level private sector work experience). Increase the focus on Foreign Internal Defense or FID. Make the US military increasingly an embedded advisory training force which is primarily tasked with surging the capacity of allies. Encourage the best and brightest to join the US military in lieu of Google, Facebook, etc.

But all this requires money. Reduce the number of soldiers, but don't decrease the budget, until global security threats are eliminated.

I would also greatly increase foreign aid. It is far cheaper to facilitate foreign countries to fight Takfiri extremists than it is for Americans to fight them directly. Moreover, normal muslims hate the extremists much more than we do.

anan said...

Mojo, I would support redirecting US military spending to the "training command." Or keeping the defense budget at current proposed levels and sharply increasing spending on educating soldiers (graduate and undergraduate degrees).

This would greatly benefit our societies long term. When these soldiers leave the military they would turbocharge entrepreneurship and the US private sector. They would create a lot of wealth and jobs around the world.

anan said...

"I would want sovereignty over the banking system in the country I would run."

I think what you meant to say is that each country should have its own monetary policy.

In my view all banks around the world should be regulated by a single global regulator. It is too hard for national regulators to regulate them now. For most practical purposes the world has a single integrated interdependent financial system.

In general you support countries having their own monetary policies. OK. But what about countries that are already part of a monetary union.

For example if Greece devalues today, still every borrower in Greece would owe money in Euros. Let's say the Greek currency fell by 90%. That would increase the amount every Greek person owes on their house mortgage, care loan, credit card loan and business loan by 900%. The majority of Greeks would go bankrupt and loose "EVERYTHING." All their savings, retirement, everything.


There are challenges with monetary independents as well. If the people in a country and around the world lose confidence in a central bank, their can be a sudden panic or capital flight. Often this leads to hyperinflation, devaluation, and massive unemployment.

For example the Argentine people confront this challenge right now. Few people in Argentina or in any other country trust the Argentine central bank. There is deep fear that Argentina could see a dramatic rise in inflation or a hyperflation.

As a result very few people around the world (or Argentine citizens for that matter) are willing to do business in Argentina, invest in Argentina, or lend money to Argentinians. The result is that Argentina's economy is likely to see sharp drops in living standards.

Iraqi Mojo said...

"Defense is being cut to about 10% of the federal budget"

anan, could you provide evidence to back up this statement?

Iraqi Mojo said...

"Ask your average American whether the defense budget should go up or down in 2013, and by how much, and they’ll tell you to cut spending by a whopping 18 percent. Ask your average member of Congress the same question, and no matter which party they’re from, you’ll likely hear that defense spending should barely budge from where it is right now.

...Now just compare that to what both Republicans and Democrats are currently proposing: Rep. Paul Ryan (R-Wisc.) and House Republicans are trying to pass a budget that would keep base discretionary spending the same in 2013, as compared to the previous year."

anan said...

The Obama budget projects that defense spending falls to 2.7% or 2.6% of GDP. Total federal spending is likely to be about 25% of GDP. 2.7%/25% = 11%. This assumes 2.5% potential annual GDP growth, no output gap and 6% steady state unemployment.

Several aspects of the deep defense budget cuts are disturbing. Funding for soldier education is being gutted. Including phasing out language training such as Pashtun, Dari, Arabic, Punjabi and Urdu.

There are several ideas on how to increase the ROI of defense spending. Including operating combined coalition aircraft carriers and other combat formations. Including multilateral joint R&D and production of many high end weapons platforms (that Congress currently blocks.)

Unfortunately, Congress isn't acting smart.

Iraqi Mojo said...

'Something sinister must be happening over at Murdoch's Wall Street Journal (could it have to do with the ongoing criminal investigation in the UK?). Somehow they've allowed the truth of the past year's government spending cuts to be written in one of their official WSJ economic analysis blogs. Without layoffs in local governments (eg, teachers, firemen, police officers, and other vital public services), the unemployment rate would be a full percentage point lower than it is today, at 7.1%.'

Iraqi Mojo said...

'The Obama budget projects that defense spending falls to 2.7% or 2.6% of GDP. Total federal spending is likely to be about 25% of GDP. 2.7%/25% = 11%. This assumes 2.5% potential annual GDP growth, no output gap and 6% steady state unemployment.'

So this is how you came up with "Defense is being cut to about 10% of the federal budget"?

I give you an A for creativity:) You really should be working in govt.

According to several sources, defense spending was 20% of the federal budget in 2011, and according to several other sources, defense spending is not likely to change much in 2012 and 2013.

"In 2011, 20 percent of the budget, or $718 billion, paid for defense and security-related international activities. The bulk of the spending in this category reflects the underlying costs of the Department of Defense and other security-related activities. The total also includes the cost of supporting operations in Iraq and Afghanistan, funding for which totaled $159 billion in 2011."

Iraqi Mojo said...

Jan 2012: '“Can I give you the facts?” Maher asked Rohrabacher. “So far every budget Obama has had has increased military spending,” he said. “This year they’re asking a reduction from $531 billion to $525 billion, 1.6 percent.

...And while the Obama administration has outlined a plan to reduce military spending by nearly $500 billion over the next 10 years, that figure is taken from levels of projected spending. As the New York Times noted this week, “over the next four years, the Pentagon budget would rise each year, reaching $567 billion by 2017.” The Times adds that “adjusted for inflation, the increases are small enough that they will amount to a slight cut of 1.6 percent of the Pentagon’s base budget over the next five years.” '

madtom said...

"Total federal spending is likely to be about 25% of GDP."

A death sentence for your freedom and that of your children.

If you ask me both sides are crazy, the left wants to spent 40 trillion over the next ten years, the right wants to spend only 36 trillion, and the left calls that "draconian"

madtom said...

Mojo the other day I left a comment about the left wanting to spend 40 trillion over the next ten years, and the draconian right wanting to spend a measly 36 trill, the nerve...and some other stuff.. but I forgot to add that they only expect to take in 18-22 trillion over the same ten years. So can you imagine that they are already planning to add 14-18 trillion to today's 16 trillion dollar debts.

How will they ever pay that back...

Iraqi Mojo said...

They are hoping for some future boost to the economy, the kind we had with the .com boom.

The federal debt is worrisome even if the economy improves.

madtom said...

So austerity suck and out fairy godmother is going to pay the money back?

Iraqi Mojo said...

Maybe invest more in infrastructure and education and less on defense. We should encourage solar and wind energy instead of subsidizing oil companies. That would be progress, and our current congress is short on progressives.

Iraqi Mojo said...

We've also been dealt a bad hand called "Reaganomics".

'While Social Security is solvent for the short-term, there are long-term issues with the program that stem from situations that occurred over thirty years ago. In the 1980s, Republican President Ronald Reagan cut tax rates drastically. In 1980 the top tax rate was 70%, which was cut to 50% by 1984 and finally down to 28% by the time Reagan left office in 1988. Supply side economics, or "Reaganomics", was the economic system that Reagan used and was the idea that giving wealthy Americans more money would create jobs which would then "trickle down" to other Americans.'

madtom said...

"subsidizing oil companies"

What you really wanted to say is you want to end the manufacturing tax credits? The same credits wind and solar do get. But I think what your really saying here is that you want to transfer wealth from efficient energy to less efficient energy provider, right?

Unfortunately wealth transfers don't add any wealth to the system, just moves them around, like moving chairs on the titanic. And a chair is a poor substitute for a lifeboat.

Social security is not funded from the general fund, but from a SS trust fund which is funded buy FICA taxes which went up over the last 30 years...not sure how supply-side has anything to do with that. The big problem with supply-side is that spending went up. No matter where you put the tax rate, if it went up, down, or sideways, spending always went up, up, and up. So I do not understand the whole argument, whatever it was that you wanted the money for, you had the money, we spent the money on every project, yet your still complaining about supply-side...the problem has been that WE SPENT THE MONEY.

madtom said...

"To the extent that people hold their wealth in government securities rather than in a form that can be used to finance private investment, the increased debt tends to reduce the stock of productive private capital. In the long run, each dollar of additional debt crowds out about a third of a dollar’s worth of private domestic capital, CBO estimates."

The basics, why communism, socialism and Obamanisum fail every time.

Iraqi Mojo said...

When you consider energy efficiency do you consider the cost to the environment? Or is that for future generations to worry about?

Just as our kids should not inherit very high debt, they should not inherit a fvcked up planet.

And isn't the cost of solar competing with hydrocarbon-generated energy these days?

madtom said...

Well I don't know the cost to the environment, no doubt pollution is bad, but so are most of the prescriptions on table now, maybe even worse for the environment than we think. I read just the other day that wind mill can have a big effect, buy causing mixing in the atmosphere, something that is very dangerous and very complicated. If that is true, and I don't know that, it might be worse tot he environment that coal power...

You know you mentioned more money for education, and it got me thinking about the problem we have here, University of Miami/Jackson School of Medicine is bankrupt, and so there were people talking about the many problems with big education, they were talking about the hundreds of millions of dollars the school receives from the Federal gov., How could it be in such big trouble, so much trouble they may have to close the hospital???...So the guy is taking and said, They have about 15,000 students, and about 15,000 Administrator?? "15,000 administrators"

Where is the outrage? why don't arrest these people execute most of them...How could that be?

But I have a solution for Miami's jobs problems, just send us enough money so that everyone in Miami can be a UoM/J SM administrator and all our problems could be solved.