Monday, June 16, 2008

Conservative governments who run large deficits

When do conservative administrations run big budget deficits? One answer might be that they face almost inevitable electoral defeat and wish to leave the pantry bare to restrict the options of future less conservative administrations. That's Paul Krugman's view of the rationale for the Bush tax cuts and the resulting huge US government deficits. A Machiavellian might apply the same reasoning to John Howard's huge tax cut offers in the face of electoral defeat at the last Federal election.

Of course Howard left Rudd with a huge budget surplus - not a deficit - but forced Rudd to match his tax cut policies in an environment where inflation and interest rates were accelerating and where Howard knew Laborite stupidity towards restricting markets for labour would complement inflationary pressures in driving higher unemployment.

The prospects for a Labor-induced recession might have looked good to Howard with, at best, a short vacation from office for the Coalition. The issue is whether politicians exhibit this foresight?

Update: Gregory Mankiw discusses the same issue in an entertaining 'Starve the Beast' post. there is a long discussion over at Catallaxy.

5 comments:

Anonymous said...

Wake up Harry, we haven't had regulated labour markets here since 1993 and still do not.
your set of liberal one eyed glasses are very poor.

Howard left a cyclical adjusted budget deficit of $11b according to Access Economics.

A disgrace given the the commodity price boom.

derrida derider said...

It's utterly ridiculous to call the current slowdown "a Labor induced recession". The seeds of this, by your own admission, were sown by the previous government. Don't you care about your own credibility?

As for failing governments leaving big structural deficits to their opponents, it's less cold calculation and more simple desperation leading to an "apres moi le deluge" mindset.

hc said...

Derrida,

I am not sure what you nqare getting hot under the collar about. I think I am agreeing with you at least in part.

I was suggesting that Howard possibly saw the economy slowing with higher inflation and cleaned out the pantry prior to losing power. He understood that Labor will face difficulties in allowing real wages to fall and this will force difficulties.

conrad said...

"I was suggesting that Howard possibly saw the economy slowing with higher inflation and cleaned out the pantry prior to losing power"

The wonders of democracy and governments looking to do their best for the people. Perhaps that's what Mugabe thinks too. If he completely wrecks everything, the opposition will have a hard time.

timh said...

It'd be really interesting to find out whether there have been governments who have consciously done this. When a government's back is against the wall, there certainly an element of risking it all for one last win.

But to intentionally damage the country, you'd have to pretty confident that a) you were going lose and b) the other guys couldn't just blame things on you.

Personally I think it's about going all out to win than rather a slash and burn approach. Who knows though.