Thursday, March 21, 2013

Opening with conclusions,

Opening with conclusions, in Fiscal Consolidation Strategy: An Update for the Budget Reform Proposal of March 2013, John F. Cogan, John B. Taylor, Volker Wieland, and Maik Wolters write:
As a consequence of the global financial crisis and great recession government deficits have risen substantially, thus creating the need for a fiscal consolidation strategy to reduce deficits and stabilize government debt. Looking forward, sustained spending increases are particularly worrisome, because they ultimately require raising tax rates beyond pre-crisis levels, even after the economic recovery. The distortions resulting from higher tax rates would then constrain the economy’s trend growth for a long time.

One could argue that Figure 1 consists largely of prediction, and that less the prediction, the Figure is largely empty:

Graph #2: Similar to Figure 1 but without Prediction

One could argue that the starting point for Figure 1 was "cherry picked" to give the greatest effect:

Graph #3: Similar to Figure 1 but with a Different Cherry Picked Start Date

One could look at all the years in the St. Louis Fed's FRED dataset, with an elliptical trend line painted on:

Graph #4: Maybe This Is What the Trend Looks Like
On Graph #4 you can see the big off-trend spike concurrent with the Second World War. A bit after that, you can see a small off-trend spike, peaking at 20, concurrent with the Korean War. And you can see a general pattern that follows the red trend line.

One could argue that the budget balancing of the 1990s and the feeble spending of the 2000s left the Federal component low for near two decades, and that this insufficiency was the cause of the global financial crisis and great recession. I'm not prepared to make that argument, but one could argue.

Alternatively, one could argue that Federal spending reached a plateau in the 1950s and might have rested at that level indefinitely. But the ratio was undermined when GDP growth faltered:

Graph #5: Maybe This Is What the Trend Looks Like

Minsky's 1966, again.

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