The logic and necessity of the Tea Party

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Almost all economic commentators denounce the tactics of the Tea Party. In my view this reflects a lack of understanding of politics.

An example is Glenn Stevens’ implicit denunciation this week:

The immediate need is for the US authorities to lift the debt ceiling, then for them to work towards longer-term sustainability.

This might be what they should do but would they?

The core problem of government spending is that too often governments get credit for spending in the short term, without having to bear the costs of its long-term consequences. In America this effect is exacerbated because a lack of party discipline means that individuals can hold out for special deals for their areas.

Not surprisingly, they then spend too much. If congressman simply do as the Governor suggests then the problem will perpetuate.

Sure we could just increase the debt limit now and then negotiate spending cuts later but what would be the likely result of that?

Pretty clearly the politicians would be free to revert to their earmakring, rent-seeking and wild-cat spending ways. As Republican Jeff Flake from Arizona said this week on the lack of earmarks on the debt ceiling bills:

It is the most refreshing thing to see what’s going on there … This type of thing a few years ago would have cost us $20 billion. Now, a couple of pizzas and you’re there.

That’s because when the spenders need approval to keep spending the power is with those who disagree.

But if the US followed Stevens’ path the cutters will need approval to cut, and then the negotiating power will shift in the opposite direction.


  1. Am I reading you correctly.

    you would adopt austerity measures whn Unemployment is over 9%.

    Debt will only start falling once healthy growth returns. That is when you adopt Austerity.

    1. You’re right. The US should follow the succesful Japanese path of permanent Keynesian expansion.

  2. In the long run we are all dead but how long is exactly the short run?

    Fine if you want to argue that Japan’s initial slump was due to a lack of Keynesian stimulus but what explains their continuing malaise?

    Even in a Keynesian model it can be nothing but structural issues not a lack of demand.

    1. Wow, Posen seems to think that contractionary monetary policy seems to have played a part. Who could have imagined? The JCB seem to like deflation targets. What they need is sustained inflationary, loose monetary policy. Not the pschisophrenic monetary policy they currently have (on/off/on/off, nothing permanent etc). Who wants to invest, consume etc, when the JCB has permanently entrenched deflationary expectations? Forget fiscal policy, they have a serious monetary problem.

      Same goes for the US of A. What the US of A needs to do is anchor NGDP expectations with a good monetary policy framework & policy.

    2. Should you wish to stick to your Keynesian knittings this will provide some relief:
      “The deal includes a lot of spending cuts, but it’s important to understand how backloaded these cuts are. The headline figure is $2.5 trillion in cuts over ten years, but less than 1 percent of those cuts will come in FY 2012. The near-term fiscal changes are so small that they will matter very little for the economy. “

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