I am currently writing a book on fiscal consolidation, bubbles and dysfunctional intermediation (two chapters are available on the websites of the Dallas and Kansas City Federal Reserve Districts, the central banks of Greece, Poland and Australia, the Federal Treasury of Australia and the US (Bureau of Public Debt) plus a dozen or so universities in the US, Canada, Europe and Australia). Robert Leeson ----- Original Message ----- From: "Pat Gunning" <[log in to unmask]> To: [log in to unmask] Sent: Friday, 8 April, 2011 2:56:34 AM Subject: Re: [SHOE] roots of fiscal consolidation Robert, I see from the internet that "fiscal consolidation" has been popular for several years now. I assume that your request pertains to democracy. Here is a good answer from Answers.com. FISCAL CRISIS Actual or supposed inability of the state to raise enough tax revenue to pay for its programme. Theories of fiscal crisis were widespread in the 1970s, both among Marxists such as James O'Connor (/The Fiscal Crisis of the State/, 1973), and non-Marxists such as Samuel Brittan (/The Economic Consequences of Democracy/, 1977). These writers argued that no government could extract more in tax revenue without imperilling liberal democracy, nor could it cut services. Theories of fiscal crisis appeared to be discredited in the 1980s. In the United Kingdom, the Thatcher administrations lowered the top marginal rates of income tax. Because the burden of tax was shifted to indirect taxes <http://www.answers.com/topic/fiscal-crisis#>, especially value added tax, enough people seem to have believed the false claim that the burden of tax had been reduced for democracy to survive. In the United States, there were significant tax reforms 1981 and 1986, which again broadened the tax base and cut marginal rates of income tax. New Zealand introduced a tax reform of similar scope. So long as taxes are collected in imperceptible ways—such as through National Insurance contributions—it seems that fiscal crisis can be put off. But it may recur. The ageing of the population in advanced capitalist states means that health and social security expenditure per head must rise sharply to maintain the same level of service, to be paid for by levies on the economically active, who form a declining proportion of the population. Generally, politicians are unwilling to admit to this harsh truth, so it is predictable that talk of fiscal crisis will recur when the illusions cease to work. Read more: http://www.answers.com/topic/fiscal-crisis#ixzz1InKLYFzr There were debates during the 60s and 70s over (1) the burden of the debt, although these were about a debt that did not threaten fiscal insolvency or an inflation to reduce it, and (2) the size and growth of government. A contribution to that literature was the ratchet effect by Robert Higgs. Rough descriptions of this literature are available through Wikipedia, I believe. http://search.yahoo.com/search?p=+rachet+effect+%22growth+of+government%22&ei=UTF-8&fr=moz35 If I go way back, I can recall hearing about debates among the founders regarding the outcome of allowing universal suffrage. As I recall, at the time the US was formed, only landowners for the most part were allowed to vote in many if not all of the various states. (Not even all MEN were equal!) The worry was that if everyone was permitted to vote, the poor would demand laws that discriminated against the rich. Perhaps the current fiscal crisis in the US is partly a delayed legacy of the expansion of suffrage over the last 150 years. Also, a search of James M. Buchanan and "fiscal crisis" turns up some interesting results. http://search.yahoo.com/search?p=%22James+M.+Buchanan%22+fiscal+crisis&ei=UTF-8&fr=moz35 My own view is that economists have not very well succeeded in teaching the basic lessons of (1) the marvel of capitalism (as opposed to imperialism) and (2) the limitations of collective decision making (the field of "public choice"). So the typical educated citizen does not have much of a clue regarding how to evaluate a program aimed at reducing spending or raising taxes. (Fortunately, due to the expansion of the internet, one can learn some of these lessons by watching "Freedom Watch" and "Stossel" on the Fox business channel, although this channel seems to be excluded from some markets.) Democracies make it possible to resolve property conflicts peacefully, but the jury is still out on their ability to avoid a deterioration of the institutions required to maintain a vibrant capitalist system. At the other extreme, a socialist democracy that takes advantage of the potential higher productivity of the division of labor, a la Smith, is not even possible (see Ludwig von Mises's "Socialism"). A democratic nation may flounder and stagnate, like India did for most of its history. Its only hope for growth, however, is to institute the institutions required to establish and maintain a capitalist system. One other point. A substitute for fiscal consolidation is money creation and subsequent inflation. We haven't heard much about this in the public debates. A return to the work of Milton Friedman on this issue might be in order as a complement to the study of the historical roots of fiscal consolidation. On 4/6/2011 3:40 PM, gb wrote: > I would be most grateful to know the historical roots of fiscal > consolidations, the debates, and the major theoreticians. > > The global financial crisis and the subsequent recession increased > government outlays for transfer payments to households and reduced tax > receipts in the United States and other developed countries. In > addition, the U.S. and some other governments recapitalized failing > banks, insurers, and other firms and initiated Keynesian “stimulus” > programs containing one-time rebates, even higher transfer payments to > households, and additional government spending on infrastructure. > Consequently, government budget deficits and government debt as a > percentage of GDP rose sharply. The IMF and other international > financial organizations called upon countries to create a “credible > plan for a fiscal exit” and avoid a government debt crisis.They > recommended a fiscal consolidation program that would reduce > government budget deficits and stabilize government debt as a > percentage of GDP. > A fiscal consolidation program may accomplish its goals by either > reducing government spending or increasing government receipts > (including tax increases, higher user fees, and asset sales). > Many thanks, > Gordon L. Brady, Ph.D., M.S.L. > Senior Economist > Joint Economic Committee > United States Senate > 242 Ford Building > Washington, DC > [log in to unmask] > 202-225-6024 > > -- Pat Gunning Professor of Economics Melbourne, Florida http://www.nomadpress.com/gunning/welcome.htm