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The Forum > Article Comments > How to avoid triggering a financial crisis and fix the US budget deficit in six easy steps > Comments

How to avoid triggering a financial crisis and fix the US budget deficit in six easy steps : Comments

By Saul Eslake, published 5/8/2011

If the US ran its finances just a little more like Australia it wouldn't have a budget problem.

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I follow this debate a bit on Bloomberg and to me what seems to be
developing is a political game of chicken, with the main prize being
the next presidential election.

Political strategists are well aware that if the US economy is still
sick at the time of the next election, Obama is less likely to win
and limiting his spending is one way to achieve that. Obama is
responding by cutting the one sensitive spot where tea party
senators don't want cuts, that is military spending and threatening
to cut that even more, if they should push harder.

Personally I think that Obama has been quite reasonable. Even
wealthy Americans like Warren Buffet freely admit that the very
rich are lightly taxed in America and could easily pay a bit more.
So his first move was to cancel tax cuts for those very rich, before
cutting those earning below a quarter of a million. He also tried
to close a few loopholes such as corporate jets and other things,
but was blocked. Those new tea party senators are quite obstinate,
even old veterans like Senator McCain agree on that one.

When Bush took over from Clinton, US finances were in pretty good
shape. Bush introduced tax cuts for everyone, but then started
two wars and increased spending without funding it. Cheney made it
clear that he thought that deficits do not matter. By the time
that Bush/Cheney left office, the economy was in the gutter, the
deficit was huge and trying to repair it without Govt spending is
a pretty difficult task.

But US voters seem to have short memories. " It's the economy,stupid"
remains true and if its still weak next year, Obama will invariably
be blamed
Posted by Yabby, Friday, 5 August 2011 9:18:58 AM
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“But US voters seem to have short memories. " It's the economy,stupid"
remains true and if its still weak next year, Obama will invariably
be blamed”

There is no IF about it. There is no way that the US economy can recover.
Posted by sarnian, Friday, 5 August 2011 9:59:25 AM
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http://deadlinelive.info/2011/08/03/drunken-ben- Here we see Ben Bernanke sloshed at the Elwood's Corner Tavern finally admitting that the US economy is stuffed.Ben however did not take responsibility.

You tell me Saul the morality of the US Federal Reserve creating money from nothing which depreciates the US $,then has the audacity to loan it as debt to the US people.They are stealing from the US people via inflation and then further penalise them by expressing this theft as debt.

Taxes will not fix a broken economy.Heard of flogging a dead horse? Austerity just makes it worse.The fake derivative market needs to be separated from the real productive one.There needs to a Glass Stegal Act to triage the derivatives.Put a tobin tax on all financial and currency transactions.No more taxes on the real productive economy.
Posted by Arjay, Friday, 5 August 2011 10:14:28 AM
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The author has some insightful suggestions for attacking the deficit, supported by numerical estimates of impact (although the suggestion of a federal GST would come up against the politics associated with the current levying of State sales taxes).
But the article is written as if the US is like any other country (Australia?). No mention of Empire. The bulk of federal government expenditure is on the military-industrial-intelligence-security complex. The US is omnipresent across the globe, expanded rather than contracted since the break-up of the Soviet Union, built on the fabricated 'War on Terror'. The mooted expenditure cuts include the military sector, but the likelihood is that those planned cuts will not take place.
(As a small gesture to sanity, moral as well as fiscal, the US could pull the plug immediately on the $3bn annual present to the rogue state that is Israel, and the subsidiary package to Eqypt to maintain that state as a satrap of its neighbour.)
Moreover, the fact that the US dollar has acted as the global currency post WWII (and for 40 years without gold backing) has allowed the US government atypical fiscal leverage. The ratings agencies, either utterly stupid or utterly politicised, have been missing in action.
The complementary factor is the tax structure favouring the elite. Reagan started the rot for personal taxation in the modern age. Now we have corporate tax evasion on a massive scale.
The whole edifice is dysfunctional.
Frankly, the fact that the global financial system is centred on this edifice highlights that perhaps we shouldn't care about saving it either in its present state
Posted by evan jones, Friday, 5 August 2011 10:41:55 AM
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The United States has no hope of overcoming it's enormous debt burden. The U.S creates money within a fractional reserve banking system. As such the U.S economy must sustain continuous growth to offset the payment of interest owing on money lent into the system. Unfortunately, Saul, like most economists fails to grap the one single fact regarding economics on a finite planet and that is the ability to grow an economy when net energy is in decline. According to the International Energy Agency (IEA) Peak Oil occurred in 2006, major oil producing countries are unable to raise production due depletion of existing fields and rising populations within these countries are using more and more of their own energy resources. Without cheap energy, you cannot have growth, without growth you cannot sustain a fractional reserve banking system, thus no ability to pay off interest and debt. Welcome to a very different future, real growth is dead and is not going to return in any meaningful manner into the future
Posted by Geoff of Perth, Friday, 5 August 2011 2:42:10 PM
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Geoff of Perth,as Ron Paul says it is ficticious debt.If the fed actually borrowed the money from someone who produced something then the debt would be real.Creating money from nothing is stealing from the people.The US Constitution says that new currency should only be created by elected Govts not private banks.Both the debt and interest should be wipped.Get rid of the US Fed since it is the cause of all our grief.The World Bank and IMF should follow suit.
Posted by Arjay, Friday, 5 August 2011 5:18:24 PM
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One obvious way to reduce government spending is to reduce the number of wars the US is currently fighting.

While it is currently dropping bombs in 6 different countries, it is also estimated that 1 in 6 US citizens are now on food stamps.
Posted by vanna, Saturday, 6 August 2011 6:55:27 PM
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Yes Vanna,which is a point that Saul has cleverly side stepped.Ron Paul also wants to end the wars of corporate imperialism and the rest of Congress hates him.
Posted by Arjay, Saturday, 6 August 2011 7:27:44 PM
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Arjay,
I understand that one of the reasons why the Bush administration reduced the tax rates for the rich, was to increase the amount of tax being paid by the rich.

The rational was that if their tax rates were reduced, more of the rich would not become involved in tax avoidance schemes, and the net result would be more taxes being paid by the rich.

I dont know how this turned out.

However, there must be something deeply wrong with a system, where over 50 million people in the US do not have health insurance, it is estimated that over 100 cities could shortly become bankrupt because they can't raise enough revenue, but companies such as "WARREN Buffett's Berkshire Hathaway has reported a 74 per cent rise in second-quarter profit to $US3.42 billion on improved results in its derivatives portfolio and gains on its investment in Goldman Sachs".

http://www.theaustralian.com.au/business/companies/warren-buffets-berkshire-hathaway-reports-spike-in-second-quarter-earnings/story-fn91v9q3-1226109744510

Obviously the poor are being forced into the US army to find employment, (and therby helping to man the military-industrial complex), but I also think that large conglomerates in the US are also exploiting the population for all they can, and in whatever way they can.
Posted by vanna, Sunday, 7 August 2011 5:31:26 PM
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Presidents and Pentagon chiefs start new wars even before they finish fighting the old ones! The U.S. initiated aggressive wars against five nations (Afghanistan, Iraq, Pakistan, Libya, Yemen)?
The Pentagon gets roughly half of every tax dollar.54% of the pie goes to the military compared with 30% for all human resources, 11 percent for general government and 5% for physical resources..
Defense contractors are awash in profits while lines lengthen at soup kitchens, foreclosed families sleep in shelters, 20 million are jobless or underemployed, food stamp use sets records, summer jobs for teens have vanished, and President Obama appears willing to rat out the elderly on Social Security and Medicare as too costly while he authorizes new CIA drone attacks on Pakistan.

The Pentagon spends more for war than all 50 states spend for all peaceful purposes; the Pentagon’s armed forces are bigger than the next dozen countries combined; the Pentagon leads the world in arms sales; and the Pentagon operates 800 overseas bases for “defense” when, in fact, they are used, like Diego Garcia in the Indian Ocean, for aggression.
Posted by sarnian, Sunday, 7 August 2011 8:13:22 PM
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Vanna & sarian,I think that the Western Corporate Elites will now push for war.They have decimated our economies and now probably fear us more than the Chinese or the Russians.So war be it risky even for them,will be their escape.

The riots/protests happening all around the planet have them very concerned.The internet has a created a new awarness that they hadn't counted on.They know how fragile and tenuous their grip on power is,but fear more than anything else the general populations' growing awareness.
Posted by Arjay, Sunday, 7 August 2011 11:08:49 PM
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Arjay, you might like to look up The Onion and perhaps reconsider your views on what bernanke may or may not have said in some bar. The fact that the piece you refernced was clearly labelled "satire" should help...
Posted by Antiseptic, Monday, 8 August 2011 10:23:15 AM
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Most politicians seem capable of only learning lessons the hard way. A likely double dip recession, further credit rating down grade and yet another game of chicken over the debt ceiling seem inevitable given the hard line, ideological positions taken up by the major parties.

Perhaps there is a glimmer of hope that within the next few years, Tea Party advocates and liberals may eventually find a common enemy for massive cuts: the system of broken federalism where 3 states are already in debt default and others teetering on default. The solution could be USA reinventing itself as the United State of America with just the Congress legislating for all Americans, the President maintaining the nationan's check and balance but with all state legislatures and the US senate wound up. Government service and infrastructure delivery deligated to City Governments to national quality and performance standards.

A streamlined government could be just the ticket to enable some desperately needed long term strategic planning by the USA whilst massively cutting over a trillion dollars annually from their bloated and dysfunctional federal system of government. It's an approach that could do wonders for Australia's productivity as well.
Posted by Quick response, Monday, 8 August 2011 3:20:12 PM
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Antiseptic I know it was satire and stated so a couple of comments later.It would has lost its' impact had that been made obivious.I see no reason to change my views.Benanke is destroying the US economy by counterfeiting the peoples' money.You cannot solve a debt problem by creating more of it.They need a Glass Stegal Act to triage the derivatives.Cut the spending and end the Fed.
Posted by Arjay, Monday, 8 August 2011 7:01:37 PM
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It would be really interesting to see someone do the numbers on what America's position would be like if run "the Australian way". Whilst our debt levels are disgraceful given the position that we were in and the lack of need in hindsight for the spending spree, we are still in great financial shape compared to most countries in the world. Some of that has to do with the resources sector, but not all of it. It would be a mammoth task but it would be an interesting exercise to see if a country the size of the US would be more effective run the way we run a country.
Posted by Country Gal, Monday, 8 August 2011 7:55:28 PM
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Country Gal,
You are correct. Australia is very much in debt.

With a population of 300 million, the US has external debt of $14.3 trillion.

With a population of 22.6 million, Australia has external debt of $1.169 trillion.

Per capita, the external debt of Australia is higher than in the US.

As % of GDP, the external debt of Australia and the US is equal at 95%.

Not a great record for Australia, and we are very lucky to have so much coal and iron ore.
Posted by vanna, Monday, 8 August 2011 9:46:24 PM
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The US economist Henry George in 1879 proposed the replacement of income tax with a tax on land values. This has been tried in many parts of the world with somewhat beneficial results, including in Australia. The effect of this tax is to cause the speculation in land values to cease. This brings more land into use which in turn causes its competitive cost to reduce. This then reduces the cost of producing goods and causes more of them to sell and this encourages more activity and less unemployment. Today without LVT a few greedy land monopolists are the reason for the lack of full employment and the slump in businesses. They do nothing but benifit from the tax payers invested money (by government) in the surroundings.
TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!
Posted by Macrocompassion, Monday, 8 August 2011 10:30:56 PM
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