In the U.S., No True Fiscal Conservatives - Simon Johnson/NYT

[WillyT]

In the U.S., No True Fiscal Conservatives
October 14, 2010, 5:00 am
By SIMON JOHNSON
Simon Johnson, the former chief economist at the International Monetary Fund, is a co-author of “13 Bankers.”

<snip>

But what really busted the United States budget and pushed up our debt-to-G.D.P. ratio was the way the financial system amplified the housing-based boom-and-bust through 2008. While there were some “feel good” effects through the end of 2007, we then faced the worst recession since World War II.

...

The increase in our budget deficit to 10 percent in 2009 and 2010 was primarily because of our automatic stabilizers; the government took in less revenue as tax receipts fell and paid people more in unemployment benefits. Only 17 percent of the increase in government debt (in the baseline budget of the Congressional Budget Office) is because of discretionary spending of any kind.

Think what you like of the fiscal stimulus — either the Bush 2008 version or the Obama 2009 effort: it is simply not the big-ticket item its critics make it out to be.

If you want to fix the United States budget, keeping the deficit under control and reducing government’s debt, you must address the risk-seeking behavior of big banks. No fiscal strategy can be credible without addressing the major problem that brought us to this point.

...

There is no way to handle the failure of a global megabank, and the management of such banks know this and so do their creditors (as Gillian Tett noted in a trenchant Financial Times column). This amounts to carte blanche for further uncontrolled expansion of risk-taking.

...

Fiscal conservatives — and everyone else — will most likely ignore this advice. In that case, we’ll soon face a major fiscal crisis in the United States, again as a direct result of financial sector irresponsibility. Then taxes will rise as Social Security benefits fall sharply, and unemployment increases beyond current levels.

<snip>

More: http://economix.blogs.nytimes.com/2010/10/14/in-the-u-s-no-true-fiscal-conservatives/

:kick: