In these challenging times, when we are facing both rising deficits and a sinking economy, budget reform is not an option. It is an imperative," Obama said in the statement. "We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist, or interest group," he said. Obama said he would ask his economic team to "think anew and act anew" to meet new challenges. "We will go through our federal budget -- page by page, line by line -- eliminating those programs we don't need, and insisting that those we do operate in a sensible cost-effective way," Obama said.
Rubinomics – at least as I understood it – meant that we accelerate Federal spending in the midst of a recession but tell Wall Street over the long-term, we are serious about long-term fiscal restraint. We might also give tax cuts to liquidity constrained people such as the working poor but raise taxes on those who are not liquidity constrained – such as Bill Gates and Warren Buffet. In other words, short-term fiscal restraint to actually REDUCE national savings with some assurance to Wall Street that once this recession is over, we restore a commitment to increasing savings and investment.
While John Taylor seems confused about this one, Paul Krugman gets it:
Thus, John Taylor — a very good economist, when he wants to be — insists that we must respond to the economy’s temporary weakness with a permanent tax cut. Let us reason together. Does it make sense to let one recession dictate tax policy in perpetuity? What happens if there’s a boom; can we increase taxes (no, because then the cut wouldn’t have been permanent.) What if there’s another recession? Do we permanently cut taxes again? Is there a tax-cut ratchet (or maybe racket)? Think this through, and it makes no sense at all. And Taylor’s argument against the obvious answer — government spending as stimulus — is pure gobbledygook
In just a few weeks, we will finally have a President who also gets it even if that lame duck never did.
"We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist, or interest group," he said."
For emphasis: "or exist solely because of the power of a politician, lobbyist, or interest group,"
How does one assess the current run on the Treasury by the financial services industry in light of the second part of the statement? What's a few hundred billion, a couple of trillion, more or less when we're sacraficing the entire budget for the sake of a hallowed sector of the economy? Or should that be hollowed sector? Hollowed of any semblance of fiduciary responsibility.
Jack - the numbers for the financial services rescue plan can be misleading as they represent the values of traded assets and NOT government expenditures. So let's say we give $25 billion to Citigroup in exchange for $25 billion (some odd book valuation figure) in their troubled loans. The increase in the government debt is NOT $25 billion. Rather it is the difference between this $25 billion and the market value of the troubled loan. While this market value may be less than $25 billion, it is certainly not zero.
What, if any, due diligence has been done to evaluate the probable real market value of the toxic sludge that Citibank is likely to unload? I might feel a bit more comfortable about the enormous expenditure, call it investment if you like, if a real investor with a track record for determining market value were at the Treasury till. Say Buffet rather than Paulson.
This use of tax liabilities to mitigate or remove a financial sludge is to me a great travesty and a mystery. The Fed can and has purchased such "assets" with funds conjured from the ether.
There is no tax liability created from a Fed purchase (a sludge disposal). The result of such a purchase is to throw lots of money into the system at the point of failure. The purchase of these "assets" using "appropriated" ($700B) money creates a future tax obligation. The recipients of the money being the same in either case it is a mystery as to why the American people would allow themselves to become indebted when this indebtedness is obviously avoidable.
I would appreciate a response to this query from the learned and esteemed economists that typically create blogs here on "econospeak". It will be an educational experience for me as I am quite bemused. What I am seeing seems to contradict my understanding of the economic universe.
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