187 Comments

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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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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The decline in the stock market has already wiped out $10 trillion of market cap, more than the $7 or $8 trillion the federal government injected into the economy during the pandemic. Yet inflation persists. Putting money into the hands of poor people is more inflationary than putting money into the hands of rentiers. Pandemic benefits were spread much more evenly than stock market wealth, ergo they created buying power in a way a fat stock market simply doesn’t. A good stock market pushes up prices of high end real estate and room rates at fancy hotels. Pandemic benefits pushed up prices of cars, TVs and normal widgets. An aside— pasta prices have increased over 50%, but that’s because Ukraine and Russia are both grain exporters and grain commodity prices have almost doubled. Next year may bring a historically profitable harvest in Saskatchewan.

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founding
Oct 18, 2022·edited Oct 18, 2022

Actions: $1,000B Infrastructure Bill. A $1,900B ARB. The $740B "Inflation Reduction Act." A $500B giveaway by "forgiving" student loans. Over $4T.

Results: real wages are down 6% since Jan. 2021; the S&P500 is down (18%) YTD nominally; Inflation is at a 40-year high. The Strategic Petroleum Reserve is at its lowest point since 1984.

Matt's proposal is to "drain the wallets of those who can most afford it". Based on results to date, the President and Congress are draining our wallets as fast as they can.

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I actually think why there isn't interest in deficit hawkery is quite simple - the mental model that would say that deficits should grow in 2010 and but be cut in 2022 is a keynesian demand management one. But most people find the idea that the deficit should be used be used to put a floor or ceiling to economic growth weird and scary. So we always get pro-cyclical fiscal policy - as economies enter recessions and government spending on welfare increases people demand cuts, as economies get hot and expenditure on welfare falls people become complacent about the deficit. This is the big objection to keynesianism - that it fundamentally becomes an excuse to spends lots of money during recessions which will never be repaid

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House Republicans have said that they won’t vote to increase the debt ceiling if they have a congressional majority unless there are serious cuts made to a variety of entitlements. There’s your deficit hawks.

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Given that rich people have a lower propensity to consume, is there any reason beyond fairness/equity/etc. to raise their taxes specifically?

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While I think MMT is a broadly idiotic idea (Noah Smith had some good posts about why), what they get right is that the focus should be on real resources rather than money. That means stimulus when inflation is low and austerity when it is high. Right now, that means that taxes and interest rates have to go up to cut spending power.

In a UK perspective, the recent regressive tax cuts (now rescinded) were one of the most idiotic plans that could ever have been made. Much as in the US, about 10 years ago an aggressive economic stimulus plan was both achievable and sound but it wasn't undertaken. A real opportunity was pissed away.

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The ice cream party is over, but no one in Washington has gone home.

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We need broad based tax increases. Matt’s suggestion doesn’t work, and it’s illustrated by how we talk about stimulus. When stimulus is limited to lower incomes, the logic given is that the rich don’t spend all their money anyway and would just save it, while lower classes spend more immediately. Higher multiplier. But in this case, we want the reverse, so raising taxes on just those making $700k a year will do nothing to slow aggregate demand.

As Mitt said, 47% of Americans don’t pay any federal income tax. It’s a hard political decision, but a broad based tax increase would be fair and help reduce inflation. We don’t need to balance the budget completely, but setting the US up on a sustainable path now will give us flexibility in the future.

Hopefully Biden can cut a grand deal after the election.

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It seems a just a bit blithe to be calling for "draining the wallets" or talking about "people whose money we need to be taking away"! It sure would be nice to hear a philosophy major explain the moral philosophy of when precisely it is justified to make those impositions on peoples' wallets and whether the current moment really clears that hurdle.

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Even if the politics were currently favorable to raising taxes, how many Democrats would be content with just that and not propose a ton of new spending? My experience of the 2020 primary tells me not many.

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Oct 18, 2022·edited Oct 18, 2022

Inflation is also the solution to the problem. There is no need to “cut” anything, you just need to slow the rate of increase. If we increase defense spending 4% that’s actually a 4% cut. It makes a lot of political decisions much easier.

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Popularist heal thyself.

Obviously no one is going to do any of those things for obvious political reasons. As well as the maybe less obvious reason that the economic zeitgeist takes a while to turn around as the whole Hamilton project group in the Obama administration shows.

Interestingly, I think Manchin is one of the few who has made transition. Biden has rhetorically started to pivot a bit and Republicans talk vaguely about spending, but no one's seems close to any sort of position to cut a deal.

But, by the time they might be it will probably be too late...

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I've often wondered how many people really mean "deficit" when they say inflation, or vice versa. A lot of those former deficit hawk voices are the same ones making the most noise now about e.g. student loan forgiveness being inflationary. I guess the ideological directionality is the same in both cases, and yet...(meanwhile, progressives denying it'll impact the economy and will in fact spur further growth has a different kind of nostalgic scent).

The thing about ephemeral discretionary spending above income...I mean...what else is there to do with the money? The stimulus was a decent chunk of cash, but not "now I can afford my first down payment on a house" transformative level cash. And so many things weren't available for purchase at all*, for months/years. Saving for retirement is surely good, but with all the major world-shaking of the last few years, I can't blame people for being suspicious that they'll get to have a happy peaceful retirement at 65 or whatever. The peace of mind that comes from having a sound investment portfolio also just isn't the same kind of high one gets from, like, a PlayStation 5. Copes for stress matter a lot more when acute stress is high. (For that matter, the knowledge that rising inflation means holding onto money is extra bad - I think that also drives people to spend rather than save. Because they don't know about/don't have access to higher-yield savings/investment vehicles, which would blunt or negate the loss. If the only option is keeping it in a checking account or mattress, then, yeah - it makes a certain kind of sense to spend now, before that money is worth even less a month from now.)

And I think many people are also "spending down" a different type of savings, the pent-up social energy that Good Conscientious Liberals (stereotyping, sorry) kept safely at home during the worst of covid. That often does come with discretionary spending that people don't really "need"...it just feels extra nice to see friends again, and that turns into a great excuse for bacchanalia-levels of food and drink spending. There's surely also some factor of "gotta support impacted industries" which will take some time to sort out of the national psyche. Like, at this point I've sorta internalized that delivery food should "naturally" cost X amount more, and tips should be Y percent higher, even as the covid pressures on restaurants taper off. If menu prices suddenly dropped overnight to their 2019 levels, it'd probably take me awhile to adjust behaviour. That's part of the inflation-pops-up-elsewhere whack-a-mole: total spending might be the same, but if it's allocated really differently, that makes certain baskets of goods cheap at the cost of others being expensive. (And, yes, there's still a sizeable cohort of vaxxed-and-not-relaxed who I'm sure continue to spend differently vs 2019.)

*at remotely pre-covid prices, anyway. It's not like there physically weren't any more dumbbells, Nintendo Switch consoles, etc.

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“But I don’t think it really was bad faith.”

2017-2018, republicans had complete control of the federal government. What did they, in all of their good faith, do with the deficit?

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