Quote Originally Posted by Red_Lizard2 View Post
Isn't like basic Macro pretty much: cut spending (maybe raise taxes? I don't remember a lot from that class to be honest) when things are good and spend when the economy goes to shit? I thought I remember a section too doing the oversimplification thing with taxes as well (cut when times are bad, raise them when things are going good).

If I recall as well, Sweden did pretty well in terms of having a surplus saved up when things went bad. Actually was trying to read up a bit on what exactly helped Sweden survive the recession better then quite a few other countries and I think that was mentioned. Always started going into stuff about their currency and things that went over my head xD.

Anyways, last part is important, just figured you'd know/have a decent answer for the top part.

For a basic, static, analysis, yeah. That's pretty much it.

The budget is revenue minus spending. Both of those things are hard to predict exactly. Tax revenue is a function of how well the economy is doing, as is government spending. I talked about this, and the counter-cyclical nature of it, earlier in the thread but the gist is that the budget deficit will, naturally, all on its own, move towards deficit in a bad economy, and towards surplus in a healthy one. If you think that austerity in hard times is the best policy, then you want budget policies which reduce spending and/or raise taxes. Some people think that going the other way is better.

It's possible for the federal budget to never come out of deficit in pretty much the same way that you can carry a balance on your credit card until the day you die, but that seems like an irresponsible way to go about it.

There are budget commitments in the future, and the analysis gets more complicated when you make it dynamic. If you add international markets, fluctuating currency exchange, and capital flows, it gets more complicated again. In that case, you can't just "save up" for a rainy day in the same way you can with your personal budget. But the basic idea is the same.

I don't know what Sweden's budget picture was like in 2007/8 (though either of us could look it up). Part of what has helped Sweden is that they're not part of the Euro (they were supposed to be, but they keep weaselling out). This has also been a good thing for Denmark (who, along with the UK, decided against being part of the Euro). Spain had a very good budget situation when the crisis hit, but they're getting absolutely screwed - partly because their currency can't adjust because they don't have their own currency. Monetary union without Political (fiscal) union is turning out to be a bad thing. The Greeks are even more screwed, and there's an obvious case to be made that they were fiscally irresponsible, but that's just a convenient place to put the blame. They are getting screwed harder by German banks than they did by their own government.

When the US trades with Japan, it almost never comes out even. There's always a surplus or deficit somewhere. That gets compensated in a number of ways. One of those ways is in the relative value of our currency. The Dollar can go up or down against he Yen. That makes Japanese goods either more or less expensive to us, but since Japanese goods are a relatively small part of our whole economy the changes in Dollar/Yen ratio don't affect us very much domestically.

Spain and Germany have separate economies (and separate government budgets), but they have the same currency. When Spain has a trade deficit with Germany, it CAN'T devalue its currency relative to he German currency. It's the same currency. It can't decide to not have a trade deficit - trade in the Euro zone is (mostly) unchecked.

Here's a third example: the trade between New York and Florida.

... wait... what?

New York and Florida. The exchange of goods (and services) across those 'boundaries' is in most ways exactly like the exchange between the US and Japan, or between Spain and Germany. But in this case, there is both monetary and fiscal (political, budgetary) union. What happens when there's a trade deficit between NY and Florida? Not much. No one notices. The money and the people move.

What happened in the 80s when Texas banking laws made it a very attractive place to run a Savings and Loan scam and then all those banks collapsed? (lots of the S&L losses were in Texas) Did Texas get screwed? No. We all paid. It was a federal problem. Lots of money from within our unified monetary and political borders flowed in to heal that wound. It was, effectively, a gift. No one blinked. The tax payers in the other 49 states didn't say "Hey, Texas, You're welcome."

If the Germans really want to be part of a united Europe, I think they should lead the way in saying this: "Guys, we got this. We did well over 10 years because we effectively ran a trade surplus to you. Give us those Spanish IOUs. We'll rip some of them up, and adjust the interest rates on the rest to reflect current market rates. Greece... well, look, PLEASE FIX YOUR SHIT, but the same deal goes for you."

Cheers,


AetheLove