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Steve Keen on the US fiscal cliff « Previous | |Next »
December 10, 2012

Steve Keen, reflecting on his recent presentation the US Congress says that his expectation is that the Congress will bash out some compromise with respect to the fiscal cliff. This will reduce the severity of the cliff, but it won't eliminate it completely.

Keen says that the 'fiscal cliff' developed because both sides of the House concurred that reducing the growth of government debt was the most important economic policy objective, but they could not agree on a common program to do so.

Instead, a program of indiscriminate spending cuts and tax concession abolitions was passed, as a 'Sword of Damocles' that would drop on America’s collective head if Congress could not reach a compromise by the end of 2012. So unless a deal is bartered by December 31, a set of tax increases and across-the-board cuts in government expenditure will reduce net government spending by about $500 billion, or roughly 3 per cent of GDP.

He adds that both Democrats and Republicans now fear what this future might be. The fantasy that reducing the government deficit might actually stimulate the economy has clearly been abandoned, in the light of the tragic results of austerity programs in Europe.

Keen argues that reducing government debt now may hurt the private sector far more than it helps it. It

(1) may also throw the US back into recession whilst doing precious little to reduce government debt as a percentage of GDP.

(2) could trigger a renewed period of private sector deleveraging that would put the economy back into a recession driven by falling private sector aggregate demand.

(3) the focus of the public discourse on debt should be on the dominant problem, which is the private debt bubble that caused this crisis in the first place.

| Posted by Gary Sauer-Thompson at 10:39 AM | | Comments (1)