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White House burning : our national debt and why it matters to you
\"America is mired in debt--more than $30,000 for every man, woman, and child. Bitter fighting over deficits, taxes, and spending bedevils Washington, D.C., even as partisan gridlock has brought the government to the brink of default. Yet the more politicians on both sides of the aisle rant and the citizenry fumes, the more things seem to remain the same. In White House Burning, Simon Johnson and James Kwak--authors of the national best seller 13 Bankers and cofounders of The Baseline Scenario, a widely cited blog on economics and public policy--demystify the national debt, explaining whence it came and, even more important, what it means to you and to future generations. They tell the story of the Founding Fathers' divisive struggles over taxes and spending. They chart the rise of the almighty dollar, which makes it easy for the United States to borrow money. They account for the debasement of our political system in the 1980s and 1990s, which produced today's dysfunctional and impotent Congress. And they show how, if we persist on our current course, the national debt will harm ordinary Americans by reducing the number of jobs, lowering living standards, increasing inequality, and forcing a sudden and drastic reduction in the government services we now take for granted. But Johnson and Kwak also provide a clear and compelling vision for how our debt crisis can be solved while strengthening our economy and preserving the essential functions of government. They debunk the myth that such crucial programs as Social Security and Medicare must be slashed to the bone. White House Burning looks squarely at the burgeoning national debt and proposes to defuse its threat to our wellbeing without forcing struggling middle-class families and the elderly into poverty. Carefully researched and informed by the same compelling storytelling and lucid analysis as 13 Bankers, White House Burning is an invaluable guide to the central political and economic issue of our time. It is certain to provoke vigorous debate\"-- Provided by publisher.
Book
What are the effects of fiscal policy shocks?
We propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions. Specifically, we use sign restrictions to identify a government revenue shock as well as a government spending shock, while controlling for a generic business cycle shock and a monetary policy shock. We explicitly allow for the possibility of announcement effects, i.e., that a current fiscal policy shock changes fiscal policy variables in the future, but not at present. We construct the impulse responses to three linear combinations of these fiscal shocks, corresponding to the three scenarios of deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion. We apply the method to US quarterly data from 1955 to 2000. We find that deficit-financed tax cuts work best among these three scenarios to improve GDP, with a maximal present value multiplier of five dollars of total additional GDP per each dollar of the total cut in government revenue 5 years after the shock.
Journal Article
Great Expectations and the End of the Depression
This paper suggests that the US recovery from the Great Depression was driven by a shift in expectations. This shift was caused by President Franklin Delano Roosevelt's policy actions. On the monetary policy side, Roosevelt abolished the gold standard and—even more importantly—announced the explicit objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending, which made his policy objective credible. These actions violated prevailing policy dogmas and initiated a policy regime change as in Sargent (1983) and Temin and Wigmore (1990). The economic consequences of Roosevelt are evaluated in a dynamic stochastic general equilibrium model with nominal frictions.
Journal Article
Deficits, Public Debt Dynamics and Tax and Spending Multipliers
Cutting government spending can increase the budget deficit at zero interest rates according to a standard New Keynesian model, calibrated with Bayesian methods. Similarly, increasing sales taxes can increase the budget deficit rather than reducing it. Both results suggest limitations of 'austerity measures'. At zero interest rates, running budget deficits can be either expansionary or contractionary depending on how they interact with expectations about long-run taxes and spending. The effect of fiscal policy action is thus highly dependent on the policy regime. A successful stimulus, therefore, needs to specify how the budget is managed not only in the short but also medium and long run.
Journal Article
The great austerity war: what caused the US deficit crisis and who should pay to fix it?
Rapidly rising deficits at both the federal and state and local government levels, along with prospective long-term financing problems in the Social Security and Medicare programmes, have triggered a one-sided austerity-focused class war in the USA and around the globe. A coalition of the richest and most economically powerful segments of society, conservative politicians who represent their interests and right-wing populist groups like the Tea Party has demanded that deficits be eliminated by severe cuts at all levels of government in spending that either supports the poor and the middle class or funds crucial public investment. It also demands tax cuts for the rich and for business. These demands constitute a deliberate attempt to destroy the New Deal project, begun in the 1930s, whose goal was to subject capitalism to democratic control. In this paper I argue that our deficit crisis is the result of a shift from the New Deal-based economic model of the early postwar period to today's neoliberal, free-market model. The new model has generated slow growth, rising inequality and rising deficits. Rising deficits in turn created demands for austerity. After tracing the long-term evolution of our current deficit crisis, I show that this crisis should be resolved primarily by raising taxes on upper-income households and large corporations, cutting war spending and adopting a Canadian-or European-style health care system. Calls for massive government spending cuts should be seen as what they are—an attack by the rich and powerful against the basic interests of the American people.
Journal Article
Multiparty Government, Fiscal Institutions, and Public Spending
A large body of research has claimed that budget making by multiparty governments constitutes a “common pool resource” (CPR) problem that leads them to engage in higher levels of spending than single-party governments and, further, that this upwards fiscal pressure increases with the number of parties in the coalition. We offer a significant modification of the conventional wisdom. Drawing on recent developments in the literature on coalition governance, as well as research on fiscal institutions, we argue that budgetary rules can mitigate the CPR logic provided that they (1) reduce the influence of individual parties in the budget process and (2) generate endogenous incentives to resist spending demands by coalition partners. Our empirical evaluation, based on spending patterns in 15 European democracies over nearly 40 years, provides clear support for this contention. Restrictive budgetary procedures can eliminate the expansionary fiscal pressures associated with growing coalition size. Our conclusions suggest that there is room for addressing contemporary concerns over the size of the public sector in multiparty democracies through appropriate reforms to fiscal institutions, and they also have implications for debates about the merits of “proportional” and “majoritarian” models of democracy that are, at least in part, characterized by the difference between coalition and single-party governance.
Journal Article
Fighting with One Hand Tied behind the Back: Political Budget Cycles in the West German States
Theories of political budget cycles have been contested because scholars find that incumbents can manipulate deficits in the pre-election period only if fiscal transparency is low. I argue that these findings do not generally rule out the possibility of fiscal electioneering. Governments may increase spending on highly visible policies. The composition of the budget serves as a second-best strategy. It increases political support without straining the budget balance. An empirical analysis of the West German states reveals alternative electoral budget strategies and ultimately point to the importance of analyzing how governments choose between alternative fiscal instruments.
Journal Article
Who Pays for National Defense? Financing Defense Programs in the United States, 1947—2007
Past studies on military expenditures in the United States have primarily focused on the extent to which guns versus butter trade-offs are prevalent without examining this relationship in the context of how other fiscal policy tools are used to pay for defense. Using annual data from 1947—2007, this study examines the relative importance of defense financing policy measures, such as guns versus butter trade-offs, tax increases, and deficit spending in paying for defense. The results show evidence of guns versus butter trade-off during the Reagan Era, but not during other periods. Both federal tax policy and deficit spending have played influential roles in funding defense spending during peacetime. This modeling strategy points to the importance of analyzing the effects of multiple fiscal policy tools when studying the forces that drive military spending in the United States since World War II.
Journal Article