How to solve the fiscal dilemma

June 8, 2010
Germany, UK) only to be told that they're still not big enough.

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How should governments deal with enormous budget deficits? In Europe, the playbook seems to be clear: announce enormous budget cuts (see Germany, UK) only to be told that they’re still not big enough.

Jeff Sachs today has a slightly different idea. He starts off by saying that the fiscal response to the financial crisis was a bit silly, and indeed that “stimulus measures such as temporary tax cuts for households or car scrappage schemes were dispiriting wastes of scarce time and money”. If the country was headed into recession, then it was the job of central bankers to “prevent depression” while actually allowing the recession to run its course: “the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be accepted.”

OK, fiscal response is off the table now, so we’re all closing that particular stable door. The question is how to stabilize national finances going forwards. And Sachs says that’s pretty much impossible in the US:

America has absolutely no consensus on how to restore budget balance, as it is trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises.

His solution is to fly in the face of that maniacal public:

Governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit.

I don’t think this is possible, politically, in either the US or the UK. In the US, the middle classes are implacably opposed to tax hikes on people making more money than they themselves will ever make. I’m not entirely clear on the reasons for this, but I suspect it has something to do with the American Dream of becoming incredibly successful: no one wants to reach that gilded land only to find it full of taxes. And in the UK, the Tories have moved far enough to the left already, both before and after the election: there comes a point at which the parliamentary Conservative party simply won’t get dragged any further in that direction.

Still, the way that the UK fiscal situation plays out is going to be an interesting dress rehearsal for the fiscal politics which will surely come to the fore in the US over the next few years. US politicians can’t learn much from Germany: the two countries are too far apart, politically. But the UK is much more American, in many different ways, than Germany is. And if the current UK government somehow manages to stick together for the next three or four years, there will be a lot of important lessons to be learned on this side of the pond.

Update: Matthew Yglesias and Robert Waldmann say that in fact Americans are not opposed to higher taxes on the rich. Maybe it’s just American politicians who are.


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