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Gunnar Martinsson's avatar

I agree completely with the analysis. But there is exactly zero chance that any of this will happen, right?

Let us remember that it was very recently that Biden decided to do student loan forgiveness, which is the worst possible policy in current economic conditions (increases deficit, increases spending, bad distributional effects, no long term structural benefit).

He seems incapable of doing anything even remotely unpopular, and what Matt proposes would be *very* unpopular.

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Matt Hagy's avatar

While I agree that now would actually be an appropriate time for austerity policies, I don’t think the politics will work out. Any policy that seeks to decrease the consumption of a significant enough portion of the electorate to affect inflation is going to be politically toxic. Just look at how we can’t even contemplate increasing taxes on anyone earning less than $400k/year.

I don’t think it matters what combination of tax increases and benefit decreases compose such an austerity policy. The simple fact that a non-trivial number of voters will see a proposal to decrease their spending power will lead to massive political blowback. I just don’t see how any politician could propose or support such a proposal without consigning themselves to future electoral defeat.

Although I do see some potential if there is some sort of external force constraining our options. For example, the new UK government has been forced into a U-turn when their hastily developed tax cuts and financial support for household energy bills led to turmoil in their government bond market as well as a rapid depreciation of their currency.

I guess something similar could happen in the US. My understanding is that a lot of the 90s concern about deficit was focused on “bond vigilantes” causing financial turmoil if investors lost faith in US government debt. E.g., Carville’s famous quote about wanting to be reincarnated as the bond market because, “You can intimidate everybody”.

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