Thursday, 17 November 2011

Next time someone bemoans "reckless spending"...

... and claims that "out of control" government programs caused the deficits in almost every developed country, keep this in mind:

Way back in 2008 much of the world sank into recession because housing bubbles in the United States, the UK, Ireland, Spain and elsewhere began to deflate. This ended a boom in construction and caused consumption to plunge as the housing wealth that provided its foundation vanished. 
Unfortunately, memories at the NYT are apparently weak. It told readers today: 
"To the roster of pain inflicted by the European debt crisis, add this: rising and persistent joblessness among young Britons." 
Of course, the European debt crisis is very much secondary in this story. The proximate cause of the high unemployment in the UK is the decision of the government to impose a harsh austerity package involving cuts in spending and higher taxes. This was a decision by the government, it was not in any way a necessary result of the UK's debt burden as the article implies. Financial markets were willing to lend the UK money at very low interest rates. 
Also, the cause of the "debt crisis" was the economic collapse that followed the bursting of the housing bubble. Most of the countries now facing serious problems paying their debt had modest budget deficits or even surpluses in the years prior to the collapse of the bubble.

(Dean Baker. "The NYT Disappears the Housing Bubble". Beat the Press blog.)

It never ceases to annoy me every time the Winnipeg Sun or even the Winnipeg Free Press goes onto some rant about how important "cutting the provincial deficit right away" by slashing programs is. The amount of damage this fashionable nonsense, which fails to address the actual cause of the deficit*, causes is enormous.

*That cause being a global aggregate demand slump - due to the housing bubble burst - leading to less profits which results in less tax dollars


  1. Are you saying there is absolutely nothing the government could cut? OR that all government programs are essential?

  2. Cuts that make a dent in the budget deficit are almost never the cuts to "useless red tape" or programs that don't add to aggregate demand. Besides, government agencies are tasked with making cuts from time to time.

  3. Though even big spending cuts can have the perverse effect of hurting aggregate demand so much that the budget deficit actually grows because of them and cutting "red tape" often results in negative unintended consequences (witness Glass-Steagall)

  4. You didn't answer my question. I was asking specifically if you think that all government programs and spending are essential?

  5. Depends on what you mean by "essential" and, yes, as with almost any organization there is some waste in the civil service, but most social programs are useful.