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If Even Germany Manages To Do This I Will Be Impressed
Old 05-17-2010, 12:01 AM   #1
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If Even Germany Manages To Do This I Will Be Impressed

FT.com / Brussels - Berlin calls for eurozone budget laws
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Old 05-17-2010, 06:07 AM   #2
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I'd like to see fiscal discipline through the business cycle but I think a law that requires tax increases and spending cuts during every recession will prove to be a very bad policy.
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Old 05-17-2010, 08:24 AM   #3
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I'd like to see fiscal discipline through the business cycle but I think a law that requires tax increases and spending cuts during every recession will prove to be a very bad policy.
I'd agree that a deep recession is the worst time to cut spending or raise taxes in terms of economic impact, but there needs to be more discipline in terms of generating surpluses during economic booms in order to finance the deficit spending in recessions. Otherwise this "half-Keynesianism" results in a death spiral of debt. We can overspend in a recession IF we can pay down the debt in good times. We can't "act Keynesian" only in hard times; it's just not sustainable.

Unfortunately, government's track record of using surpluses to pay down debts or build a "rainy day fund" is atrocious. There's just way too much pressure by special interests to either spend it on a pet program or refund it to the taxpayers.
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Old 05-17-2010, 09:16 AM   #4
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Unfortunately, government's track record of using surpluses to pay down debts or build a "rainy day fund" is atrocious. There's just way too much pressure by special interests to either spend it on a pet program or refund it to the taxpayers.
You and I agree.

The irony, though, is that folks have their panties in a bunch now about government deficits at a time when the government should be running deficits but didn't care so much when such deficits were actually irresponsible (pre-crisis). It's the pre-crisis deficits that are the problem, and the driver of the outsized deficits now.

But I don't think pro-cyclical austerity during downturns is the answer to boom-time profligacy. It's hard to see how policies destined to create greater financial volatility can result in greater financial stability. Or even lower borrowing costs.

Perhaps a counter-cyclical requirement to run surpluses when trailing 12 month GDP is north of 2% would be a better solution than an absolute balanced budget requirement.
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