International%20Debt%20Crisis

1
International Debt Crisis Part III
2
NW Debt Crisis United States

• Readings
• The Morning After
• - Peter G. Peterson
• The Austerity Trap the Growth Alternative
• - Jeff Faux

3
Debt Austerity in the US

• US government, like all other governments,
  usually has outstanding debt
• Rapid buildup of US government debt (1980s)
  occurred due to an increase in borrowing
• Reagan tax cuts, coupled with Reagan depression,
  reduced growth of govt. taxes
• Reagans defense buildup, coupled with failure to
  make equal cuts to social expenditures, were
  financed with borrowed money

4
Debt Austerity in the US cont.

• Parallel growth in consumer debt despite Volcker
  attacks
• Viewed as normal since advent of credit cards and
  consumer credit
• Due in part to efforts to defend standard of
  living
• Consumers faced with falling wages and rising
  unemployment

5
Peterson Argued for Austerity

• Our national preference for consumption
  over investment the root malady
• The wage binge of the 1970s real wages
  stagnant
• Consumption bacchanalia
• Blind and self-indulgent gusto

6
Peterson His Real Argument

• Begins with an overview look at the failures of
  Reagan era supply-side economics
• Actually extended supply-side rant
• Differs from Reaganauts who tended to attack only
  excess consumption in the form of welfare
  cheaters and government fatcats
• Peterson broadens attack to everyone his central
  focus on entitlements for the middle-class

7
Peterson Analysis of the Problem

• Two main ideas both domestically
  internationally
• Too much consumption
• - Whether from personal income or government
  programs
• Too little savings and investment
• - Productivity crisis

8
Peterson Solutions to the Problem

• Involves shifting income from consumption to
  savings and investment
• Tame the federal budget deficit, mainly by
  cutting growth of entitlements
• Cut growth of medical care by leaving it to
  market forces
• Increase federal government revenue via
  consumption-based taxes value-added tax
• Encourage investment by reducing taxes on savings
  and investment

9
Faux Argued Against Austerity

• The Austerity Trap and the Growth Alternative
• Fauxs article a response to Petersons extended
  rant on the necessity of austerity
• Arguments echo those in the Third World
• - Economists argued that the way out of the debt
  trap is not to impose austerity, but to raise
  output, consumption, and investment simultaneously

10
Fauxs Argument Against Austerity

• Root malady is not excessive consumption, but
  insufficient production
• Rise in consumption as a percentage of GNP was
  not due to an acceleration in consumption, but do
  to a slow down in the increase of GNP
• Faux argued that Peterson ignored tight money and
  financial deregulation when explaining high
  interest rates that undercut investment
• - Policies brought about by Carter, Reagan,
  Volcker

11
Faux versus Peterson

• Faux argues that Peterson ignores
• Runaway shops production flight
• Casino economy diversion of money from real
  investment into financial speculation
• Fact that entitlements actually fell as a
  percentage of government expenditures from 45.2
  to 44.1

12
Fauxs Alternative Strategy

• Growth instead of austerity
• Managed Growth
• - Public-sector led investment strategy
• Use government policy to shift resources from
  wasteful speculation to real investment
• Expand government investment in social
  infrastructure growth, new trade policy dealing
  with access to markets, new social contract
  between labor and capital
• Global Keynesianism
• - Growth for the world to induce investment