It’s Hard To Take The Fiscal Hawks Seriously: Testimony To The Senate Budget Committee (via The Baseline Scenario)

Simon Johnson, MIT Professor and co-author of 13 Bankers, does excellent macroeconomic analysis on his blog, The Baseline Scenario. This post is from his testimony to Congresss this week.

Two quotes stand out to me. Johnson reminds us that the danger of another financial collapse is real and something the deficit hawks (i.e. Republicans) are not taking seriously:

“As long as massive financial institutions continue to take on huge amounts of risk, there remains a strong possibility that governments in the US and other countries will once again face unexpected liabilities and collapsing tax revenues in a financial crisis – pushing up debt by another 40% or so of GDP.”

Johnson also shows why extending the Bush tax cuts are not only hypocritical coming from the Republican deficit hawks, but ineffective:

“Critics say that this amounts to increasing taxes at a time of high unemployment, and instead the tax cuts should be extended as a stimulus measure. This overlooks the fact that tax cuts are an inefficient form of stimulus, because many people choose to save their additional income instead of spending it. If the goal is to boost growth and employment immediately, it would be better to let the tax cuts expire and dedicate some of the increased revenue to real stimulus programs. Alternatively, if some tax cuts are extended, there should be provisions to eliminate them automatically when unemployment falls to a preset level.”

By Simon Johnson Most of the discussion of federal budget issues today is misdirected.  The shorter run issues are dominated by the likelihood of another financial crisis – and the implications that would have for the budget deficit – but no "fiscal hawks" even want to acknowledge the issue.  It is very hard to take anyone seriously if they refuse to look at these (uncontroversial) numbers.  Medium term, we obviously need tax reform.  The good ne … Read More

via The Baseline Scenario