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Article: “Default, dear Brutus, is not in our stars but in ourselves” by Mark Steyn

I love it.

Incidentally, the commenters are amongst the most lucid and rational I’ve ever seen on a non-blog news website. Top notch.

Not that I necessarily agree with the author. Conflating the long run debt problem with the short run recession problem is an economic fallacy. The long run demands major structural change, by which I mean massive spending cuts. These spending cuts must come primarily from both social security and defence (since there’s not really anywhere else for them to come from). They must also come from closing inefficient tax loopholes (for corporations and for individuals) which have no rational basis in policy.

On the other hand, the short run is more complex. Some might argue that the market will auto-correct without government intervention. I’m tempted to agree – unlike the Japanese financial crisis, there is no rot eating at the heart of the financial system. There are green shoots growing, and there have been green shoots growing since a year ago even if those shoots have occasionally been trampled by the big stampy boots of government ineptitude.

Government arguments over debt limits are causing doubt in financial markets and undermining business confidence. What’s more, the private sector created 1 million jobs; the government slashed 1.1 million jobs due to spending cuts.* An active decision to withdraw government spending from the market is still government intervention. Slashing government spending will create more private sector jobs than are lost, but not in the short run.

Structural cuts to long-term entitlements and other long run spending commitments won’t cause short term damage to the economy, so long as we don’t cut short-term spending. Once we realise these are two separate questions, we are halfway to the right solution to this intractable problem.

The final part of the question is how to stimulate the economy (if we should wish to do so). A payroll tax holiday (a short term suspension of payroll tax) will not work; businesses make hiring decisions based on long-term outlook, not short-term, one-off government policies. Permanent tax cuts will worsen the long-term budget outlook. I think a Rudd-style tax rebate to consumers is probably the right solution. It will (probably) stimulate consumer spending. Whilst the Rudd stimulus was criticised since consumers saved the $900 rather than spending it, this criticism anticipates a certain result. It assumes that spending is good and saving is bad – but those consumers know what they need most. Presumably many had drawn down on their savings during the GFC and they needed a top-up.

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