These authors ask. (I found this at Bonner's Daily Reckoning). I think they're on to something--which is why I post it here. The real cause of our difficulty is that the politicians don't level with us because those who do--those who occasionally raise taxes and cut benefits--don't get re-elected. The same applies to CEOs: the cautious got nowhere. We have met the enemy and he is us. Short-term thinking has ruined us.

Oddly, the MBA countries (Mexico, Brazil, Argentina) in the 1970s incurred a lot of debt. These were NOT democracies for the most part, showing that bad judgment transcends political system.

Restructuring and reform are needed to justify the bailouts; otherwise they are simply political payola. The reforms proposed by Team Obama look pretty thin to me. His Reform/Payola ratio is very disappointing. Time-wise, he should realize he's got to do the heavy lifting in his first two years. If he worries about remaining popular, it won't happen. He won't even measure up to one of his idols, Ronald Reagan.

What About Austerity?
By Juan Enriquez and Jorge Dominguez
Boston, Massachusetts

Within the billions of sentences about the financial bailout there is one word notably absent, austerity. All talk is of payments, supports, subsidies, incurring more debt, stimulus packages. The thesis seems to be: If only we spend more the party can go on. True, only if the financial meltdown is a temporary mismatch and dislocation in housing and credit markets. But suppose there is something fundamentally wrong with the US economy. Then spending more will not fix it. Getting the diagnosis right means getting the treatment right. It may save us a trillion or two.

The subprime collapse is one symptom of years of little regulation, under-taxing, overspending, and massive debt. One way to understand what is happening in the United States is to look at what occurred time and again in Latin America and Asia, hotbeds of financial and banking crises. What we are living through happened time and again in Brazil, Argentina, and Mexico, as well as Korea and Thailand.

If there is too much debt, people lose confidence in the banks, then credit markets, currency, and government.

For more than a decade, the international financial cop, the International Monetary Fund, forecast a hurricane was heading toward US shores. As did many heads of the Treasury and the Fed. It is, to paraphrase a great writer, a chronicle of an agony foretold. There are five basic drivers of these crises, all based on excess: high income concentration, too much debt, too much reliance on foreign money, not enough tax revenue, and reckless government spending. Time after time governments believe they are different. They are bombarded by warnings but ignore, postpone, spend even more, and crash.

Over past decades, most US wages have fared poorly. Despite stagnant wages, consumer spending and debt increased, fueled by cheap credit. Companies also went on a debt binge. Careless deregulation allowed financial cowboys to run the system. Responsible CEOs who kept some cash, maintained moderate debt, invested for the long term, got pink slips. Financial chop shops did leveraged buyouts using a company's own cash and credit. To survive, companies piled on debt.

Many politicians decided reelection depended on cutting taxes and offering more benefits. Increase Medicare, postpone Social Security reform, hire more bureaucrats, and pay for a two-front war. Debt grew to pay for this party. These were not true tax cuts, just postponed debt; now we owe more and the bill has come due with interest.

Complicating this crisis is US economic hegemony. There were few places to park a lot of money. Despite the euro, European policies on debts and deficits are not much to brag about. So foreigners have gorged on US debt. The United States continues importing more than it exports. Middle Easterners and Asians who save and invest bought dollars for decades, but some of this money is now fleeing. The dollar has dropped sharply. Gold and oil have skyrocketed. In financial crises, huge pools of capital cross borders very quickly; a few can make a great deal of money shorting the country's currency.

The United States requires a massive restructuring to address its debt, cutting back on its borrowing, spending, and wars. The bailout package is essential to keep the credit markets open. But absent sentences that include the word austerity all the bailout will accomplish is a temporary postponement. Bailout and stimulus are a stopgap.

A solution requires the country to begin to spend what it earns, reduce its mountainous debt, and address massive liabilities, restructure Social Security, pension deficits, military, and Medicare. No wonder politicians would rather spend more of your money now rather than address these problems. Because we have been spending 5 to 7 percent more each year than we earn, a forced restructuring, triggered by a currency collapse, would have the same effect on wages and purchasing power that the housing collapse had on housing prices. So let's learn from our Latin and Asian friends and act before it is too late.

But what would the wingnuts say? They might cheer gutting SS and Medicare, but touch CEOs or the defense budget??? Why, why that's socialistic! Sputter, snort, drool.

I don't think the debate is any longer between the traditional liberals, who would run a looser fiscal ship in order to prop up failing families and develop new technologies (something Obama actually campaigned on) and traditional tight-fisted conservatives who want to stick it to working men and women. That paradigm is out of date. Team Obama itself is heavily represented by Wall Street, and I see little change from Team Bush as far as the corporate and banking bailouts are concerned. Obama is diverting slightly more to families, but has not so far demanded that the financial players clean up their acts. So I term it Payola: they are still paying the politicians' salaries and the politicians are still repaying them at least a thousand-fold. Obama is going to have to make a choice soon about whose team he's on. The results to date do not look encouraging.

The authors I cited said that one of the five factors was that we were undertaxed. That seems to me accurate, and is far from typical neocon claptrap. The affluent and rich have been undertaxed since Reagan and our wealth and inequality is highest in the developed world. I think the authors also mentioned that.

Austerity implies a sacrifice felt across the board. We need to solve a few problems that cannot be solved by hitting the middle class harder.

We need to decide how to tax and spend based on the behaviors and conditions we wish to change. And part of that means restoring and supporting middle class values in the middle class.

Consider this: A savings account, capped at 100k, that pays 12% interest. If you have 100k in it, you get a $1000 check every month. If you have credit card balance, they raid your high interest savings, or, maybe you just treat it like debit.

The high rate would be taxpayer funded. If true interest rates are 4%, that means about $8000 of 12k in earnings will have to come from additional taxes heaped on the rich. So, the well-established upper middle class citizen would be paying $8000 extra in taxes and recieve an $8000 subsidy but also have a very nice 100k emergency cushion.

The creation of these cushions would change the credit risk profiles of American citizens dramatically. If your cushion is full, risk is low, if you have no cushion, it makes no sense to borrow.

Only two types of debt need be unable to raid the cushion: owner-occupied mortages and school loans. All further borrowing(cars, furniture, consumer credit) should be actively discouraged by the government. Small business debt, of course, may also need special treatment, but can be managed by a different head of hydra.

Well ... welcome back to this enclave of relative sanity (or, at least, civility). How's life in Iowa?

You made no mention of how the $100K account was to be funded. Granted that the 12% interest would make it more alluring (and would help fund it), it is still probable that many families would never save that much (assuming no inflation anyway - it might eventually be a week's pay otherwise). Certainly that is currently the case: many families approaching retirement don't have that much saved. Assuming every family did have an account of that size, the additional taxes which would need to be collected would amount to about $1 trillion per annum. That would be a very major change in the tax take. Depending on how the tax burden was distributed, it might keep many low income families from ever saving enough to break even on the deal. I do like the idea of every family having a buffer, but I wonder whether there might not be some better way to accomplish that.

Since the turn of the century growth of employment in government has outstripped employment growth in the priavte sector, this simple fact doesn't even take into account the increased government spending which has fueled much of the employment growth in the private sector.

Is it even possible to wean our economy of this? Certainly the deficits must be brought under control. But what happens to all those people that work for borrowed money? And, of course, we aren't talking about austerity now, we are talking austerity for what, two decades to come?

For us to control the cost escalation of health care and the military also means reduced spending into the private sector. I know we can control the deficits, we can get rid of fannie and freddie, how much of a miltary do we need we we can fry the planet at the push of a button (nukes or boots, you dont need both), we can re-structure entitlements, and we can raise some taxes. All these are fine, but will the private sector pick up the spending. or does doing that equate to shrinking the economy and having more people in need? Do standards of living fall to fall enough then to really compete with Asia and Latin America? They are doing that anyway but to quit supporting so much of the system with borrowed money means dropping out a lot of the support that holds up living standards. What is the multiplier of reduced government spending to reduced economic growth in a depressed economy?

But we really don't have a choice, do we? We either champion austerity, or it is forced on us.

I blame the end of the 60's. Turning our backs on the work ethic. The idea of I don't want to spend my life working on an assembly line like my dad did. I want to find a better way. And there was plenty of stuff that heppened to make the culture believe that was possible, rising standards of living with less work. Then things turned. Cellphones meant you were always at work, you might have been working on a computer but you were still working 60 hours a week. Now we find that not only must we work as hard, or harder, with two wages earners in a family, but we also must have lower standards of living.

We should have opted to have productivity gains put into less working hours, instead of higher wages and corporate profits. Capping standards of living but maintaining higher employment while also keeping a tighter hand on inflation. Meanwhile developing a culture that embraces the idea of vocation, the idea of altruistic work. (imo)...

Sure, I'm in favor of that, but the poor already do have austerity: the poverty level is about 34% of the median income in America, but 60% in France and Germany. Families at the median pay very little in federal income tax, but neither do they derive many benefits. All those who are above the median should be paying more in tax, and the affluent who earn between $150K and $250K should receive a healthy payroll tax hike on their Social Security. Those above $250K need a real jolt of taxation graduated up to very high (70%) rates. The Reagan revolution is dead--or should be. Cap gains should be taxed as ordinary income with no exclusion for homes, but with some discounting for how many years the asset was held. CPI inflation since around 1990 has doubled, so the income tax rate on an asset held since 1990 ought to be 50% of what it would be on a short term gain. You make $200K gain on your house which you've held since 1990 and are in the 30% bracket, you'll pay 15% on the gain. That's the way it ought to be. I suppose a limited cap gains exclusion might be taken once a lifetime after the age of 55 as per the old rules.

I don't know about giving everyone $100K in savings, but I do think that if we want people to save, we should make it tax free up to a certain amount--say $5K a year in interest. Instead Uncle Sam encouraged everyone to go into hock on housing. Big stupid mistake that was.

Welcome back.

Government workers in the UK are also way better off than workers in the private sector. I suspect this is a global problem. Govt. workers are also more unionized. As for the period of austerity, what was the period of extravagance? 12 years of Reagan-Bush and another 8 of Bush. That's 20 years. You have a better plan? At least we'd all be in the same boat and could look each other in the eye. As it is we're robbing the money from the Chinese and our kids.

For us to control the cost escalation of health care and the military also means reduced spending into the private sector.

I don't follow. What does controlling healthcare and military spending have to do with reducing spending in the private sector? I'd think that a nice single payer healthcare system like Britain's would save us 6% of GDP (nearly a trillion a year) and we could reduce defense spending by another $300 B or so. That's over a trillion a year in savings from our present unsustainable course.

"We can get rid of fannie and freddie". Truer words were never spoken. Fannie Mae is in the American Dream business, and as George Carlin pointed out, you have to be asleep to believe in it.

"We can re-structure entitlements", and we must. We need to ration medical care for the terminally ill instead of expensively keeping them alive. Better that the healthcare dollars go towards people who could benefit. This is not heartless; good palliative care (hospice care) is probably more humane than what we do. We also need to means-test Social Security and either tax affluent retirees on their benefits or hike the payroll tax on affluent earners.

"Will the private sector pick up the spending. or does doing that equate to shrinking the economy and having more people in need?"

Rich people tend to save more of their earnings; hence, taxing them more doesn't hurt spending as much. In any event, we need to move more towards increasing our exports--becoming productive again. We've had a 35 year decline.

Now we find that not only must we work as hard, or harder, with two wages earners in a family, but we also must have lower standards of living.

I hear ya. This has already been happening for decades. It takes two college educated workers to qualify for the home that one high school graduate used to be able to afford. Maybe I'm exaggerating, but not by much. We globalized, or rather, the multinational corporations did. That's the way the cookie crumbles. At least the rich should be paying more to help us out with the kind of benefits Europeans take for granted.

We should have opted to have productivity gains put into less working hours, instead of higher wages and corporate profits.

I just read that hours worked in June was a new low: 33 hours a week. Maybe we're becoming France whether we like it or not. Frenchmen without benefits R us.

I more or less agree with you on the tax changes. However, wouldn't it be nice (to sound Reaganesque) if inflation were 0%? It would make so many things fall into place 'naturally'. It would help if the Fed were required to target a 0% rate instead of the apparent 2% level. I recognize it isn't easy, but lots of things aren't easy. Making it policy couldn't hurt.

I bought my house in 1962, added on to it in 1969 and again around 1999. I am currently in the middle of having some hardscape work done. Trying to adjust the value for inflation would be something of a nightmare - and I have kept many records. I wonder how practical it would be. Which leads me to the subject of IRAs and 401Ks.

Withdrawals from those retirement accounts are taxed 100% as ordinary income, except for any after tax contributions - normally made to a 402K if I remember correctly. When one rolls over into an IRA after retirement, the pre-tax and after tax accounts are normally merged - although I guess one could roll over into two IRAs. In any case, the earnings in the account, most of which would qualify as long-term capital gains, cannot be isolated and taxed that way. Since there are generally adequate records to allow the identification of the long-term portion, it seems no more than fair to allow it to be taxed on that basis. Of course, an alternative (thoroughly acceptible to me) would be to eliminate the capital gains tax rate or apply it, proportionally as you suggest, to all capital gains.

What about capital losses with your approach? Should their deductability increase with time? Do you favor the current artificial method of determining depreciation, or should everybody, including all businesses, be force to use cash accounting methods for this?

"We need to ration medical care for the terminally ill instead of expensively keeping them alive. Better that the healthcare dollars go towards people who could benefit. This is not heartless; good palliative care (hospice care) is probably more humane than what we do."

It would be even more humane to adopt assisted suicide as a way of ending life, and it would be even less costly than hospice care. I do not look foreward to dying slowly and painfully as my parents did. Maybe we could be sent to an outpost in Afghanistan so that we could go out in a blaze of glory.

Gingham, For us to control the cost escalation of health care and the military also means reduced spending into the private sector.

Genedio, I don't follow. What does controlling healthcare and military spending have to do with reducing spending in the private sector? I'd think that a nice single payer healthcare system like Britain's would save us 6% of GDP (nearly a trillion a year) and we could reduce defense spending by another $300 B or so. That's over a trillion a year in savings from our present unsustainable course.

The government doesn't make the boots or supply the food for the soldiers, or heal the sick or process the paperwork in the health care system. Private entities do. If the government reduces how much it pays these entities private enterprises lay off people or close operations. When you talk about saving over a trillion dollars you are also talking about removing over a trillion dollars worth of consumption, or economic activity. It would be nice if one could just say, 'well that means taxes can be reduced by over a trillion dollars so consumption will be made up for there'. But since we are borrowing the trillion to start with that's not how things will work. You'll axe the consumption on the part of the government but it wont be made up for elsewhere, all it would do it help future economic activity, doesn't keep you from shrinking the economy now.

You forgot to mention the even bigger savings ($800 billion) which would result in many health insurance company leeches joining the unemployment rolls. Think we could find some productive work for them to do?

My thinking is that we must stop considering the United States in isolation, but as part of the global economic system. We can't continue consuming without producing, and debt does not equal wealth.

Phil: Maybe we could be sent to an outpost in Afghanistan so that we could go out in a blaze of glory.

LeRoy: What an intriguing suggestion, Phil! Are you proposing that our elderly geezers would be willing to become suicide bombers, as a way of imitating the tactics that terrorists have used on us? Give them a taste of their own medicine, so to speak? Kamikaze geriatrics?

But wouldn't they catch on pretty quickly?

I have always favored the idea of reallocating, say, 30% of the defense budget to a much invigorated space program. Many of the firms now making weapons for the Pentagon would instead be building components of, for instance, a Mars colonization effort. In fact, many of the firms that DO build weapons also build instruments and vehicles for the space program: Lockheed-Martin as one example. This would help to minimize the unemployment effects you fear from cutbacks in military spending. Not to mention that I think it would be all-around better for the human race. A recent short blurb in The Economist noted that global military spending has reached the unprecedented level of $1.4 trillion, annually. A colossal misallocation of resources. If Obama wanted to be a truly visionary leader, he could convince other world leaders to simply divert 10% (a measly 10%!) of this spending to a larger-scale space effort. $140 billion a year would accomplish a lot, in short order...

As long as the reallocation isn't coming from deficit spending there is a lot we could do with it. The good part of the plan you suggest, as you mention, is that the industries involved wouldn't have to be completed disbanded, just minimally re-tooled, and it also allows for discovering technologies that can be possible be used by the general public.

My comment about using the reduction for tax cuts shouldn't have indicated a preference for that, it was just the handiest reference for shifting consumption. The main point being that reductions in government spending on certain programs can only be achieved without economic pain if they don't come out of deficit spending.