How Does It Measure Up?
The PBS News Hour asks how current attempts to regulate financial firms compare to past efforts.
Policy Points
We’re Not Greece
In recent days, the idea that the United States has economic problems similar to those of Greece has gained traction in the mainstream media. The only problem with this comparison is that it is wrong.
Let’s repeat this for the 100th time: the US government, the Japanese Government, and the UK government, among others, do NOT face a Greek style constraint — they can just credit bank accounts for interest and repayment in the same fashion as they would buy some helmets for the military or some pencils for a government school. True, individual American states do face a fiscal crisis (much like the EMU nations) as users of the dollar. That is why some 48 out of 50 now face fiscal crises (a problem that could easily be alleviated were the US Federal Government to undertake a comprehensive system of revenue sharing on a per capita basis with the various individual states). But, if any “lesson” is to be learned from Greece, Ireland, or any other euro zone nation, it is not the one that Mr. [Meryn] King [of the Bank of England] is seeking to impart. Rather, the lesson is the futility of imposing arbitrary limits on fiscal policy devoid of economic context. Unfortunately, few are recognizing the latter point. The prevailing “lesson” being drawn from the Greek experience, therefore, will almost certainly lead the US and the UK to the same miserable economic outcome, along with higher deficits in the process. As they say in Europe, “Finanzkapital uber alles”.
Do you see how these situations are different? Greece needs to make massive, immediate budget cuts all without plunging its economy into a recession so deep that the cuts generate a larger deficit as revenues tumble. It’s quite possible that there is no way to make this happen without massive external assistance. America, by contrast, simply needs to slow the rate of growth of government spending. That’s it. An increase in revenues would help, too, but what we’re basically talking about is slowing spending growth by enough that economic growth can generate the revenues to fund the government’s budget.
In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.
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That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading.
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Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: the assumption that health care costs will rise in the future as they have in the past…..
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So here’s the reality: America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes. But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.
Around The Dial – May 14
Economic policy reports, blog postings, and media stories of interest:
- The New York Times reports on the long-term unemployed.
- CEPR analyzes the wages and benefits of state and local government workers.
- Economists debate the significance of the national debt.
- Triangle Business Journal notes the strengths of the regional economy.
Manufacturing Activity in The South Atlantic: April
From the Federal Reserve Bank of Richmond’s latest survey of manufacturing activity in the South Atlantic (District of Columbia, Maryland, North Carolina, South Carolina, Virginia and West Virginia):
Manufacturing activity in the central Atlantic region expanded for the third straight month, according to the Richmond Fed’s latest survey. All broad indicators — shipments, new orders and employment — landed in positive territory, with manufacturers noting their first increase in worker numbers since October 2009. Other indicators were also positive. Backlogs increased for the first time since August 2009 and capacity utilization hit an all-time high reading since the inception of the measure. Vendor lead-time grew at a considerably quicker rate — the highest reading since August 2004, indicating slower delivery times, and inventories increased at a somewhat quicker pace.
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Looking ahead, manufacturers were more optimistic about their future prospects in April. Firms anticipated more rapid growth across the board, particularly for shipments, new orders, capacity utilization, and capital expenditures.
Understanding Financial Reform
The current issue of The American Prospect contains a special report discussing the issues that should be addressed as part of any comprehensive financial reform. The package features commentaries by such thought leaders as Elizabeth Warren, Simon Johnson, and Robert Kuttner.
In the introductory essay, Robert Johnson, the executive director of the Institute for New Economic Thinking, identifies nine fundamental issues that must be addressed in any meaningful reform:
- Derivatives reform
- Off-balance-sheet reform
- Rating-agency reform
- Restructuring of housing finance
- Separation of risky activities from the financial safety net
- Separation of activities that have inherent conflicts of interest within a firm
- Legal resolution powers for large failed institutions, with consistent cross-border standards
- Significant increase in resources and salaries for supervision, examination, and regulation
- Consumer financial protection.
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