Recent Deficits as Wartime Finance, 5/15
a paper by Hall and Sargent
George J. Hall and Thomas J. Sargent point out the similarities between the COVID crisis and the two world wars.
Negative labor supply shocks, i.e., converting civilian workers to soldiers during the twentieth century world wars, and lockdown mandates that diverted workers into unemployment and voluntary withdrawals from the labor force during the COVID-19 pandemic
Extensive government restrictions on domestic and international travel and trade
Surges in federal government expenditures mostly financed by issuing interest-bearing debt and base money
Federal Reserve support of federal bond prices and an expanded Fed balance sheet
In their conclusion, they write,
As percentages of total revenues, sources were:
taxes bonds money World War I 20.8 74.6 7.0 World War II 30.2 46.0 10.1 COVID-19 3.5 67.0 18.5
It is striking how little of the War on COVID-19 has thus far been financed by explicit taxation, even compared to World Wars I and II.
Congress, Mr. Trump, and Mr. Biden have left a huge burden for future taxpayers. Some of that will be paid by the inflation tax. But I think much of it will be paid by budget austerity in the future. Social Security and Medicare cannot remain untouchable forever.
"Congress, Mr. Trump, and Mr. Biden have left a huge burden for future taxpayers" -- Japan's 3 decades of increasing debt without big increases in taxes falsify this claim.
There were two big decades to be hugely studied - the 1930s with the Great Depression, and the 70s with Stagflation - increasing inflation and higher unemployment/ lower growth.
Trump's tax cuts, which increased the deficit, also increased the investment and production in America. Not all deficits are equally bad.
I suspect there will be far more talk about austerity type programs then are actually enacted. Then there will be some inflation leveling out before much actual reduced gov't spending (= austerity?), but the reduction in inflation, even if it is mostly just reduced energy prices, will be used to stop any more (or any?) austerity,
Note that while the word austerity also applies to normal people, with a strong budget constraint, it is used almost exclusively for "government austerity", meaning less gov't expenditures ... than planned? than expected? than desired by the Deep State? Seldom compared with actuals from the previous year. (If the desire was a 5% increase, a 3% increase can be called "austerity" - and almost always is.)
What's the best way to understand the time scale on which austerity becomes unavoidable in your model? How do we tell if it will be a matter of years, decades or centuries?