Default not such a good idea

The former Chief Economist of the IMF, Simon Johnson, was unequivocal about the effects of a US default which is being floated by some of the more ignorant members of Congress…

“It would be very damaging, there’s no question about that,” Johnson said of a debt ceiling default. “It would really destabilize financial markets and lead to all sorts of unpleasant repercussions in the United States and around the world.”

Right, OK, so it’s a super bad idea, like making margaritas from beer. But surely everything will collapse if Congress passes an increase in the debt limit but doesn’t address long term debt, right?

He added that Republican claims that the US faced even worse economic consequences if they fail to pass a deficit deal that passed investors’ muster were inaccurate: if it were true, then interest rates on long-term debt would already be going up given widespread pessimism that the two sides will produce anything major.

OK, that make sense. And what, I wonder, does Mr. Johnson recommend?

His prescription for the short term? Let the Bush tax cuts expire and reform the tax code with a European-style VAT that includes protections for the poor. Longer term problems like health care costs can be solved over the next decade or two rather than in one quick burst now.

So, basically, the progressives have been right all along, just so we’re all on the same page here. Personally, I’m not a big fan of VAT, but I am a huge fan of expiration of the Bush tax cuts. I’m also a big fan of infrastructure in which I’m joined by none other than Bill Gross of the trillion dollar management firm PIMCO (I mention that because, well, people trust him with a lot of money because he’s made good decisions in the past. I certainly think he’s a bit more qualified to talk about economics and spending than, say, Michelle Bachmann or Glenn Beck). Frankly, we need to get people back to work and give businesses some confidence that there will be demand for their production now and in the future.

Spending cuts will actually have the completely opposite effect, no matter what the general populace may think.

Though Americans rate unemployment and the economy as a greater concern than the deficit and government spending, the issues are now closely connected. Sixty-five percent of respondents say they believe the size of the federal deficit is “a major reason” the jobless rate hasn’t dropped significantly.

OK, that’s wrong. It’s not that disagree with the opinion of 65% of Americans, it’s that 65% of Americans haven’t a clue what they’re talking about. Simply, businesses don’t hire or fire because of government spending, unless that spending is related to a contract with the government. It does show the overall gullibility of the American people to whatever snake oil Republicans are selling and it also makes it crystal clear that the President and Democrats made a huge mistake pivoting to spending cuts and deficits. Because when you cut spending, you not only increase government spending (from unemployment payments) but you also decrease tax revenue because more people are out of work. In short, you make the situation worse.

And the saddest thing is that Democrats, still stupid, are willing to work with Republicans on more tax cut nonsense which won’t work and will inevitably lead to the massive defeat many of us see coming next year.

Of course, I could be wrong. I haven’t been so far, but I could be about all this.

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