Wednesday, September 29, 2010

Painting Yourself Into a Corner

There are riots in Brussels today as Europeans protest austerity measures by the EU and its national governments. Their "argument", such as it is, might seem reasonable: that the recession was caused by banks pushing the envelope, not by those citizens being affected by austerity, so somehow the austerity measures aren't "fair".

But how do they think governments got so flush in the first place? It was certainly due, at least in part, to a booming economy caused by banks pushing the envelope. During boom times, tax revenues is up. But you have to expect a bust eventually (unless you believed that late '90s bunk about the "end of the business cycle"). Governments didn't save up for the rainy days to come: not just European ones; the U.S. and certain states (I'm looking at you, New Jersey, and don't think I haven't noticed you, California) are just as guilty.

So here's the conundrum. Governments get rich because of an unsustainable bubble they tacitly encouraged. Social spending grew to match revenues. When the bubble burst, tax revenue fell and the increased spending suddenly blew massive holes in budgets worldwide. So austerity measures were necessary to close the holes. Now the people who benefitted from increased spending are pissed: their lollipops are being taken away. But what's the alternative? Current budgets are unsustainable, so where's the revenue to come from? You could raise taxes, but that risks killing the geese that lay the golden eggs.

You could target banks, extract as much tax revenue from them as possible, and enforce regulations and laws to prevent future bubbles. But that runs the same risk: if those banks run out of innovative options, tax revenue from them will wither.

What's happened is that we've painted ourselves into a corner. The only way to get out is to take that first unpleasant step onto the wet paint.

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