Tuesday, July 6, 2010

Stimulus Spending versus Deficit Cutting

There is an ongoing debate in the States regarding the best way to deal with the economic downturn, slump, recession or depression (and it has been called all of those things). The debate centers around stimulus spending versus deficit cutting. I'm going to lay out what I see as the basic issues in what I hope is non-technical language (official disclaimer - I'm not an economist).

Today Krugman is saying spend, spend, spend - clearly in the camp of more stimulus. And his arguments do make sense. The US is in the possibly worst downturn since the thirties. And he argues that the only way to recovery is to get businesses hiring and people working which necessitates a stimulus package . I kind of agree with that.

On the other hand, some are correctly noting that the US deficit at the end of June is unsustainable. Give or take a few billion dollars it is now around 13 trillion dollars. The deficit hawks argue that more stimulus means kicking the problem down the road so future generations will have to deal with it - rather than taking on the pain and dealing with it now. I kind of agree with their arguments as well.

Complicating matters is that the corrupt "To Big To Fail" banks were handed a get out of jail and get out of debt card for free. (That is a whole other blog post or probably deserves its own blog!)

In terms of worst consequences - I don't know. Travelling down the Krugman path means increasing government debt, a bigger tax burden for future generations, potential sovereign default (unlikely but not impossible) and/or bond vigalentes (much more likely - think of what happened to Greece - the cost of servicing your debt gets so high you can no longer do it and are forced to institute draconian austerity measures).

Not stimulating the economy risks anemic growth, falling GDP, falling tax revenues and continued high employment and a full blown depression.

I think the fiscal authorities in the US are literally stuck between a rock and a hard place. And I don't think they are up for the job. (Sorry Timmy)

I'm not an economist but know from experience that in some cases there is a third way (or fourth or fifth) once you move beyond thinking outside a certain framework. I think it is time for some hard questions (continual exponential growth as a model for companies or governments never made much sense to me - what happened to slow but steady dividends?) and some innovative thinking.

1 comment:

  1. We have been here before and not too long ago. Search stagflation. I suspect that a way to boost the economy without cash stimulus or tax shortfalls will involve mandates. The question is, how will the politicians do this without getting the blame?