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Tuesday, May 26, 2009

Starve the Beast (Recession Edition)

John Taylor plays Starve the Beast. First, he calls for permanent tax cuts - and only permanent tax cuts - to stimulate the economy, tax cuts that will make the long-run budget picture worse. (Paul Krugman: "You’ve got John Taylor arguing for permanent tax cuts as a response to temporary shocks, apparently oblivious to the logical problems.") Then, he tells a "scary" inflation story and argues that deficits are a bigger threat than the financial crisis and must be reduced through reductions in the size of government:

Exploding debt threatens America, by John Taylor, Commentary, Financial Times: ...Under President Barack Obama’s budget plan, the federal debt is ... is rising – and will continue to rise – much faster than ... America’s ability to service it. ...

I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers..., a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. ... A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. ...

The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. ... And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. ... This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating. ...

The time for ... excuses is over. ... Good government should be a nonpartisan issue. I have written that government actions and interventions in the past several years caused, prolonged and worsened the financial crisis. The problem is that policy is getting worse not better. ...[G]overnment is now the most serious source of systemic risk. ...

    Posted by on Tuesday, May 26, 2009 at 04:21 PM in Economics, Fiscal Policy, Taxes | Permalink  TrackBack (0)  Comments (25)


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