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Sunday, August 05, 2012

Misplacing the Blame for Budget Problems

Simon Wren-Lewis:

Watching the ECB play chess: ...I cannot help reflecting on is the intellectual weakness of the position adopted by Draghi’s opponents. These opponents appear obsessed with a particular form of moral hazard: if the ECB intervenes to reduce the interest rates paid by certain governments, this will reduce the pressure on these governments to cut their debt and undertake certain structural reforms. (Alas this concern is often repeated in otherwise more reasonable analysis.) Now one, quite valid, response is to say that in a crisis you have to put moral hazard concerns to one side, as every central bank should know when it comes to a financial crisis. But a difficulty with this line is that it implicitly concedes a false diagnosis of the major problem faced by the Eurozone.
For most Eurozone countries, the crisis was not caused by their governments spending in an unsustainable way, but by their private sectors doing so (for example, Martin Wolf here). The politics are such that the government ends up picking up the tab for imprudent lending by banks. ...

It's not just in Europe, the false narrative is thriving in the US as well. Bankers, with the help of their purse string controlled puppets in government, have been able to successfully blame our budget problems on social insurance and other government spending they oppose. According to this narrative, our budget problems have nothing to do with the Bush tax cuts, higher spending on the war, and the the loss of revenue and higher spending on social programs from the recession, it is Social Security and Medicare that are the problem. As for the recession itself, it wasn't financial executives in the private sector who made the bad decisions that caused our problems (as they made a mountain of money along the way), it was bad government housing policy that was somehow to blame. And, of course, to solve the problem we shouldn't use higher taxes to claw back any of those large, large gains those at the top made during the bubble years -- gains that in the end hurt our economic productivity instead of helping it -- instead we should reduce the social insurance for typical, working class households that had nothing to do with causing the crisis. After all, if we were to take back the "rewards" those at the top got for crashing the economy, we'll take away their incentive to do it again. Can't have that. It is much better if the "reward" to middle class households for enduring the problems associated with a crisis caused by the financial sector and the executives in charge is to reduce protection against such problems in the future by taking away or reducing social insurance. The people at the top cause the problems, and everyone else pays the cost. What could possibly create better incentives for growth, and be fairer than that?

    Posted by on Sunday, August 5, 2012 at 11:35 AM in Economics | Permalink  Comments (38)


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