Austerity Measures Are the Proper Response to a Debt Crisis

Table of Content 1. Rationale Behind Austerity and Why is Austerity Wrong 2. Economic Effects 3. Consensus Among Economists 4. Empirical Evidence 4. International Economies 6. Solving Debt Problems 1. Rationale Behind Austerity and Why is Austerity Wrong In his opening statement, Pro laid out the rationale behind austerity. In summary since government"s effort to reduce its budget deficit may revise down their expectations about future government borrowing and hence the future taxes may not be as high as they had been expecting, their belief in a lower tax burden would therefore make them be willing to spend more, thereby driving the growth. [1]In essential, there are two players in Pro"s austerity argument: consumers and investors. As for the consumers side of the argument, Nobel prize-winning economist Paul Krugman suggests that it is preposterous to assume that individual would necessarily make rationale and far-sighted decisions in the case of tax cut. In a mockery tone, Dr. Paul Krugman asked: "As for the effects via expected further taxes, how many people do you know who decide how much they can afford to spend this year by trying to estimate what current fiscal decisions will mean for their taxes five or 10 years in the future? "[1] Indeed, lack of self-control and limit of human intellectual capabilities may lead to the conclusion consumers are inclined to squander their extra-income rather than saving it, thereby causing economic hardship later on. [2] With respect to the investors side of the argument, the question was answered in my opening argument, under Section 3. I will be defending my arguments in last round. When one attempts to relate the issue specifically to the U. S. economic, it becomes more obvious that austerity is a unsustainable approach to the "Fiscal Cliff. " The best known proposal that resembles the scale of austerity would be Budget Proposal, drafted by Paul Ryan the current Chairman of the House Budget Committee. Ryan"s budget would spend $5.3 trillion less over the next decade than President Obama"s budget. Ryan would trim Medicare and Medicaid for a portion of his saving, and he would also spend $2.2 trillion less on everything else to make up for the number. [3] Be more specific, over the next decade, Ryan plans to spend about 16 percent less than the "income security" programs for the pool - everything from food stamps to housing assistance to the earning-income tax credit. Compared with President Obama, Ryan would spend 25 percent less on transportation and 13 percent less on veterans. He will also spend 6 percent less on "General science, space, and basic technology. " In addition, compared with the White House proposal, he would spend 33 percent less for "Education, training, employment, and social services. "[3] Essentially, Ryan"s budget would slash all federal spending -- outside of Medicare, Medicaid and Social Security -- by about 70% by 2050 while somewhat managing to maintain national defense spending about hose levels. [4] Ryan"s budget will disrupt the fragile economic recovery due to its massive spending cuts; cut into the investment such as education, infrastructure, and high-value research, which would promote economic growth and keep America competitive in the future; leave many low income families unprotected, and unreasonable benefits the wealthiest Americans. Ryan"s budget prompts Dr. Paul Krugamn to conclude: "This is just a fantasy, not a serious policy proposal. "[4] Rebuttal 2. Economic Effects Please refer to Section 1 for more details 3. Consensus Among Economists The NABE survey, cited by pro, is out-dated. The NABE survey is conducted semiannually and this particular one was taken between July 19 and August 2, 2011. [5] According to the latest NABE survey, published on September 24, 2012, there is overwhelming support among NABE members for a balanced approach to eventual fiscal tightening. [6] A plurality of NABE panelists - about 45% - favors equal parts of spending cuts and tax increase. About 15% think Congress should reduce the deficit only or mostly through tax increase while only 40% of respondents think Congress should reduce the deficit only or mostly through spending cuts. [6] Thus, a majority of the respondents (~ 60%) favors tax increase, either equally with spending cuts or mostly with tax increase. 4. Empirical Evidence There are at least two potential problems with Pro"s arguments First, the purported causal relation may just be coincidental or revered. Be more specific, Pro insinuates that a deep spending cut would lead to the growth of GDP, but one can equally conclude that the growth of GDP (stronger economy) would lead to massive spending cut. Dr. Paul Krugman"s remarks on Britain's austerity efforts somewhat echo this explanation: "Give me a stronger economy and I"ll turn into a fiscal hawk. But not now. "[7] Second, it is notable that the author completely ignores the economic dataset since 1949. Following the defeat of Germany, U. S. economic system has experienced a fundamental change. The commencement of Marshall Plan in 1948, the looming Cold War starting from 1945, the enactment of Medicare and Medicaid since 1965, and mostly notably, the adoption of broad-based income tax system - less than 15% of families filed tax return in 1939; 85% filed a return in 1945; all suggest that Pro"s analysis may not be applicable under the current economic climate, let alone an appropriate approach to the "Fiscal Cliff" 5. International Economies In the latest World Economic Outlook, a report combing short-term prediction with insightful economic analysis, International Monetary Fund (IMF) suggests that fiscal austerity has been more damaging than the pre-crisis consensus in the economics would have suggested: "Activity over the past few years has disappointed more in economies with more aggressive fiscal consolidation plans," and the "IMF is urging that countries have room to maneuver such as the UK, France and the Netherlands, should smooth their planned adjustment over 2013 and beyond. " [8][9] Therefore, according to IMF, it seems that austerity measures may actually worsen the already damaged economy. 6. Solving Debt Problems Dr. Alesina & Ardagna"s paper is flawed, according to IMF. In particular the fund criticizes the way Dr. Alesina identified periods of deficit-cutting. "Dr. Alesina defined major fiscal adjustments as episodes during which the cyclically adjusted primary fiscal balance (CAPB) improved by at least 1.5% of GDP. The IMF argues that movements in CAPB can be misleading. Be more specific, Ireland, for example, implemented sharp spending cuts and tax hikes amounting to 4.5% of GDP in 2009. But a collapse in house prices meant that its primary deficit actually worsened. The method used in Dr. Alesina"s report would not count this as a case of fiscal tightening. By the same token, in Japan in 1998 the government made a one-time capital transfer amounting to 4.8% of GDP to the railways, worsening its budget balance for that year alone. The CAPB improved sharply in 1999 without the government needing to implement any austerity measures, yet Dr. Alesina"s report would count this as a fiscal adjustment. " In essence, the fund argues that omitting cases like the Irish one and mistakenly counting instances like Japan"s would inexorably reduce the study"s ability to pick up the growth-retarding effects of actual fiscal contractions. [10] Thank you. 7. References [1]. . http://www.thedailybeast.com... [2]. . http://www.fas.org... [3]. . http://www.washingtonpost.com... [4]. . http://www.huffingtonpost.com... [5]. . http://nabe-web.com... [6]. . http://nabe.com... [7]. . http://www.guardian.co.uk... [8]. . https://www.commondreams.org... [9]. . http://www.slate.com... [10]. . http://www.economist.com...