Economics Debate MCXXI

Wolfgang and I have managed to bait each other into another of our usually fruitless debates on the Eurozone. Rather than continue in the ever narrowing margins of the Disqus comment system, let me start by specifying a few points on which we may agree:

(a)Other things being equal, higher taxes tend to suppress economic activity.

(b)At some point, said Art Laffer, that suppression is so great that tax revenues actually fall despite the higher rates. I don't think that this is controversial either, though my understanding is that the available evidence points to this occurring at marginal rates about twice as high as the highest current rate in the US.

(c)Taxes are a lot higher today in Greece, Ireland, Spain and Portugal than they were in 2005.

I want to also specify what I mean by austerity: a combination of higher taxes and lower government spending.

That said, I still believe that the troubles of the PIIGS all stem from excessive borrowing/reckless lending. Greece is a special case, since both government and individuals borrowed recklessly and irresponsibly. That's not the case with Ireland, Spain, and probably Portugal. Ireland and Spain ran conservative governments, limited spending and taxes, and trusted the markets to manage their own affairs. The markets failed miserably.

Local banks lent money recklessly and borrowed more from Germans to exacerbate the problem. Once it became clear that the borrowers could not afford to pay, various devices were created to transfer the liabilities from the debtor banks to the national governments. That spared German lenders immediate pain, but forced the PIIGS into painful austerity - raising taxes and cutting expenditures.

The austerity occurred mostly because the countries were in the Euro zone and desperately wanted to stay. Iceland, which suffered an even more catastrophic collapse, wasn't Euro and told it's lenders to suck it, and it's doing much better.

Comments

Post a Comment

Popular posts from this blog

Anti-Libertarian: re-post

The most pointed critique of social security and liberalism in general is the libertarian critique. The problem with libertarians, for a liberal, is that we have too much in common. We both believe in individual rights, tolerance of individual differences, and dislike government prescription of religion. The basic difference, it seems to me, is the different answers we give to Cain's (with thanks to the Captain - my original version had the corpse asking the question!) famous question: "Am I my brother's keeper?" That's not really my basic bitch against the libertarians though. My real complaint is the same as my complaint against most religion - its premise is a fraud. For those who can't stand to wait for the punchline, I believe that trying to implement libertarian principles leads to tyranny or social disintegration. Demonstrating that takes some historical (and pre-historical) context. For all but the last 15,000 or so of the 100,000 years the human spec...
Read more

Uneasy Lies The Head

Uneasy lies the head that wears a crown ........... Shakespeare Henry IV, Part II. So it is with us and our slightly distant primate cousins , so it seems. A 9-year study of wild baboons in Kenya by Princeton University and the Institute of Primate Research may turn conventional assumptions of alphas males upside down. The study found that alpha males have high testosterone levels, which allows them to dominate other baboons, get access to more food, and attract better mates. This is expected. Surprisingly, though, the alpha males also have high levels of stress hormone glucocorticoid, which scientists measured from their feces samples. In fact, the stress of alpha baboons was on par with low-ranking baboons. The convention wisdom is that access to food and females provides life security and thus less stress for dominant males. Conversely, weak males who are constantly threatened by starvation and physical violence from stronger males are thought to be more stressed. The st...
Read more

We Call it Soccer

The US played its best, and maybe only good game of World Cup, but lost thanks to brilliant goalkeeping by the Swedish keeper and the bizarre method soccer uses to settle ties when three US stars could not put the ball on frame from the 12 yard spot.  At the end it came down to a blocked shot that spun in by maybe a couple of centimeters. Well, that's football - too much like life.   Which brings me to a modest proposal.  Replace the thirty minute overtimes with as many 7-player 15 minute periods as needed to settle it.  Scoring should be much easier with fewer players.
Read more