International Debt Crisis Part III

NW Debt Crisis: United States Readings: “The Morning After” - Peter G. Peterson “The Austerity Trap & the Growth Alternative” - Jeff Faux

US government, like all other governments, usually has outstanding debt Rapid buildup of US government debt (1980s) occurred due to an increase in borrowing: Reagan tax cuts, coupled with Reagan depression, reduced growth of govt. taxes Reagan’s defense buildup, coupled with failure to make equal cuts to social expenditures, were financed with borrowed money Debt & Austerity in the US

Parallel growth in consumer debt despite Volcker attacks Viewed as normal since advent of credit cards and consumer credit Due in part to efforts to defend standard of living Consumers faced with falling wages and rising unemployment Debt & Austerity in the US cont.

“Our national preference for consumption over investment – the root malady” “The wage binge of the 1970s” – real wages stagnant “Consumption bacchanalia” “Blind and self-indulgent gusto” Peterson: Argued for Austerity

Begins with an overview look at the failures of Reagan era “supply-side” economics Actually extended “supply-side” rant Differs from Reaganauts who tended to attack only “excess consumption” in the form of welfare cheaters and government “fatcats” Peterson broadens attack to everyone; his central focus on “entitlements” for the middle- class Peterson: His Real Argument

Two main ideas – both domestically & internationally: Too much consumption - Whether from personal income or government programs Too little savings and investment - Productivity crisis Peterson: Analysis of the Problem

Involves shifting income from consumption to savings and investment: “Tame” the federal budget deficit, mainly by cutting growth of entitlements Cut growth of medical care by leaving it to market forces Increase federal government revenue via consumption- based taxes: value-added tax Encourage investment by reducing taxes on savings and investment Peterson: Solutions to the Problem

“The Austerity Trap and the Growth Alternative” Faux’s article a response to Peterson’s extended rant on the necessity of austerity Arguments echo those in the Third World - Economists argued that the way out of the debt trap is not to impose austerity, but to raise output, consumption, and investment simultaneously Faux: Argued Against Austerity

“Root malady is not excessive consumption, but insufficient production” Rise in consumption as a percentage of GNP was not due to an acceleration in consumption, but do to a slow down in the increase of GNP Faux argued that Peterson ignored tight money and financial deregulation when explaining high interest rates that undercut investment - Policies brought about by Carter, Reagan, & Volcker Faux’s Argument Against Austerity

Faux argues that Peterson ignores: Runaway shops – “production flight” Casino economy – diversion of money from real investment into financial speculation Fact that entitlements actually fell as a percentage of government expenditures from 45.2% to 44.1% Faux versus Peterson

Growth instead of austerity: Managed Growth - “Public-sector led investment strategy” -Use government policy to shift resources from wasteful speculation to real investment -Expand government investment in social infrastructure: growth, new trade policy dealing with access to markets, new social contract between labor and capital Global Keynesianism - Growth for the world to induce investment Faux’s Alternative Strategy