I think it was, in one sense, a right thing to do in the short term. I am certainly not saying it didn’t save a lot of pain. However, I think that in the long term, it’s a really bad idea. It’s kind of like that way of betting where if you lose, you double your bet on the next bet. Theoretically, you will eventually win, and win back all you have lost also. Practically though, there are limits. Either the house puts an upper limit on bets or you run out of money to bet. We can draw analogies between those two situations and the market providing credit. Chasing debt with more debt is a very dangerous game. If it doesn’t work, you’re in serious trouble. What may have been painful, but doable before, may be a lot more painful and undoable later.[/quote]
Why not spread the pain out over a longer period of time? Reduce government spending, increase taxes to the wealthy. Do enough of this and there should be some sort of recovery within a few years that will increase government revenues. The goal should be a balanced budget within ten years.
Why the need for dramatic solutions? These tend to attract dramatic minds, not the kind of steady hands that one wants guiding the ship of state.[/quote]
That won’t work because of the following. Government spending needs to be cut by some insane amount (Winston Smith has shown a report suggesting 35%, with simultaneous tax increases of 35%). Tax increases to the wealthy won’t raise enough money. Kyle Bass has pointed out that the entire net worth for the Forbes 400 would balance the budget for one year. Then what? Tax increases, were they to occur, would have to increase for everyone, yet that would be wildly unpopular and difficult to implement. Again though, you’re assuming that all of these things will necessarily increase growth at sufficient levels. Developed economies grow at a few percent per year. It’s just not enough. The U.S. is simply not going to pull off a 5%+ or 8%+ growth rate, regardless of who is in power.
As for balancing the budget within ten years, the current debt is in the order of 16 trillion USD. The current deficit is in the order of one trillion USD per year. That means that in ten years, the debt should be something like 26 trillion USD, though that wouldn’t account for the compounding of the debt. Even if, over the next ten years, deficits were reduced to half what they are now, that would still make the debt 21 trillion USD. That’s almost one third more than what it is now. What that means is that before the debt itself could be tackled, a larger portion of revenue itself would go to financing that debt (i.e. the interest on it). People keep skirting around this issue hoping that there is some magic bullet. There simply isn’t. There is going to be major pain ahead, and a general decline in living standards for many Americans (many Europeans, Japanese, and others also). The way they will deal with the debt (at least in America) is by inflating it away. That’s going to cause massive pain in itself. Ask anyone who lived through the 70s what that was like. There simply is no magic bullet here.