the important and the not-so-important, horribly conflated.

Pro-Cyclical Economic Policy Explained

In the capital "e" economy on March 6, 2010 at 4:46 pm

…In hilarious video form:

…and in dry, but biting Economist-speak:

“During the Bush administration, many of the same politicians who are now arguing for immediate budget-balancing measures were backing the theory that “Reagan proved deficits don’t matter”. This led to colossal tax cuts that created huge government deficits at the very peak of the business cycle, when the government should have been running a surplus to save up for a rainy day. Now that the rainy day has arrived, these same politicians suddenly want to cut back spending (but not raise taxes—perish the thought!) to balance the budget.

This is massively pro-cyclical economic policy. Call it the “great immoderation”, or call it “a plan to turn America’s economy manic-depressive”. It’s an error made possible by people’s instinctively wrongheaded economic impulses: when we’re flush with income, we take out more debt, figuring we can pay it off somewhere down the line; when our finances collapse, we suddenly become averse to debt. At a household level such behaviour is merely sub-optimal. On a national level, if implemented (heaven forfend), it would be a disaster; it leads to fiscal policies on the “drunken sailor/cold turkey” model. Furthermore, the distributional effects of cutting marginal tax rates during booms and then cutting social spending during busts are far from neutral. As are the political effects of running massive deficits during Republican administrations and insisting on balancing the budget during Democratic ones.”


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