There is lot of noise about Government spending and the debt. I guess everyone agrees that we need to reduce the debt, but how is the question.Looks like GOP wants to cut government spending and cut it sharply. The question is, assuming whoever is the next president and they decided to rein-in the deficit and cut government spending, how will it impact the overall economy? I don't think consumer is ready to step-in and take over from the government. Please note this is not about republican vs democratic politics, policies, etc. This is about how government spending cut will impact the economy and what section will be impacted? How it will impact, like reduced consumer income, reduced tax collections etc.
I wish there was edit feature. I would like to change the title to "Will economy suffer under government spending cuts"
Can't find the link now, but basically showed government deficit spending has been a key component of nominal GDP growth and corporate profitability during the last few years. Government spending cuts would probably hit nominal GDP and corporate profits and be deflationary
I see cutting government spending is inevitable. That is going to happen even before we touch social security, medicare, and god forbids defense spending. So how long you can avoid that or kick the can down the road? I guess, when the government spending cuts come-in we have the next bear market. So I am trying to think how to protect from it.
It's true that government spending is wasteful ,driven more by desire to buy votes than to help the economy. Even if most government spending is funneled to various fat cats, they in turn spend it on businesses who in turn spend it on people or business, who in turn....etc. It gets less wasteful with each step. So deficit spending helps the economy. In the short to medium term at least. The ways it doesn't help include when it winds up in Brazil or in banks that don't want to lend. Radical reduction in government deficit spending is thus deflationary, and is unlikely to happen no matter who wins in November.
Radical reduction in government deficit spending is thus deflationary, and is unlikely to happen no matter who wins in November.Wouldn't the reduction in spending also be met with increased foreign investment into the U.S. because the dollar becomes that much safer? I'm thinking it's a wash short term so long as government spending is gradually reduced. If suddenly reduced, it would probably take time for foreign investment into the U.S. to catch up. But this investment might be exactly what we need to prop up home prices and hence, everything else, no? Longer term, I think it would be a positive. Of course, Europe needs to get its s**t together, or the investor pool might drop further? Of course, for us to be a European safe haven , we just need to be better than Europe. :-)
Wouldn't the reduction in spending also be met with increased foreign investment into the U.S. because the dollar becomes that much safer? Like what kind of investments?
As far as I know nobody with any power in either party (Ron Paul doesn't count since he's ignored as much as possible by the GOP leadership) is suggesting an actual decrease in overall Federal spending. Some of the GOP are backing the idea that the unsustainable growth in government spending needs to be slowed down. Given that most of the GOP likes to spend money almost as much as the Dems it is very unlikely that anything except a very mild bend to the unsustainable spending curve will happen.
I think a fact that many are missing here is government does not actually produce anything. The system takes production/goods from citizens, process it through a burecracy and then less production/goods (money) gets distributed unevenly based on whatever law/program/agency etc... it is suppossed to go to. I put most of our government in the same category that Warren Buffett put a majority of investment managers into when he famously named them "helpers" in one of his more recent annual reports (can't remember which one). So I think no the economy will not suffer if there are true government spending cuts, becasue there is one less level of "helpers" trying to distribute production (money). As another poster stated there is only canidate that is acutally proposing true cuts, the rest are just proposing some form of cuts to spending increases.Sam
Government "produces" collectively what cannot be done otherwise like provide national defense, a transportation system, education, public safety, etc. Inefficient as it may seem, there are only worse alternatives.
Government "produces" collectively what cannot be done otherwise like provide national defense, a transportation system, education, public safetyIf that was all it did, we'd be in much better shape.The problem is that we borrow money to fund everyday consumption, rather than capital invesments. This is a recipe for disaster for both individuals and governments.Rich
The problem is that we borrow money to fund everyday consumption, rather than capital invesments. So is consumption bad? or consumption by Government is bad? Also, how can the consumption be really bad? In my mind if someone is consuming then someone gotta make the things that is consumed, which requires capital investments right?Hypothetically, if most Americans take this to their heart, and limit their consumption to necessities like food, basic clothing and conserve their money for investments what do you think will happen?
To a large extent the federal government isn't directly taking money from anyone. It is creating it out of thin air through the banking system when the left hand (the Fed) buys bonds from the banks who in turn have bought them from the right hand (the Treasury.) The "taking" from the public occurs indirectly through inflation and other effects.The portion of government expenditures derived from taxation does take goods from the more productive and distribute it to the less productive. While that may be good for social harmony, and is certainly good for the career prospects of politicians and bureaucrats, it doesn't lead to a more efficient economy.I have no faith in either main party, all become corrupted once they are in Washington for a while. Nobody cares about the working middle class or retirees, they are just dumb sheep to be shorn. I never cease to be amazed how many seem to believe the worst about selfish interests of those they come into contact with in the workaday world, yet somehow have faith in politicians, professional lairs, and assorted government bureaucracies , always out to protect and expand their own interests first. The great increase in wealth that has taken place in the United States and many other countries over the last 50 years is mainly due to technologic progress, which hopefully will continue to enrich the lives of it's citizens despite the anchoring drag of faulty governments.
No consumption isn't bad. Our economy depends on it. It is a fact of life that people need to eat and need clothes to wear to protect themselves from the elements.It's borrowing money to pay for these things that is the bad idea.You really can't see how borrowing money to buy these types of things is a bad idea?First, future purchasing power is reduced by the amount of interest that needs to be paid.Second, at some point, future income has to be redirected from current needs to pay back the borrowed funds.Third, there's no return on the investment. You pay 1 dollar today and get zero dollars back tomorrow. Contrast that, with an "investment" that returns 2 dollars (more or less) in the future for 1 dollar spent today (like the interstate highway system or educating the workforce).It should be obvious. And, if it isn't then it's beyond my abilities to explain it.Rich
It's borrowing money to pay for these things that is the bad idea...Contrast that, with an "investment" that returns 2 dollars (more or less) in the future for 1 dollar spent today (like the interstate highway system or educating the workforce). The very nature of Government is, it is for people by the people. There are lots of vested interests represents their causes, which means the very nature of the structure is it is not designed to be optimal or best.So there will be activities which will be considered as "waste" by someone all the time.In any case, my point is there is no such is as bad consumption because even bad consumption generates economic activity. Only time an economic activity becomes sort of "waste" is when it results in no further revenue to government in the form of taxes. Everyone has a view how much and who should be, taxed.In any case, economic activity generates Taxes which pays for the spending. If the economy falls too steeply, government has a moral obligation to step-in and bolster economy. Obviously there is a limit to this and there are no clear lines like how much spending or deficit is acceptable, or even preferable.
No consumption isn't bad. Our economy depends on it. It is a fact of life that people need to eat and need clothes to wear to protect themselves from the elements.It's borrowing money to pay for these things that is the bad idea. You really can't see how borrowing money to buy these types of things is a bad idea?First, future purchasing power is reduced by the amount of interest that needs to be paid.Second, at some point, future income has to be redirected from current needs to pay back the borrowed funds.Third, there's no return on the investment. You pay 1 dollar today and get zero dollars back tomorrow. I don't really follow. Your first two points are caveats for borrowing for consumption, and the third is incorrect: the only way you have no return on spending for food is if you never work.It's more accurate to say that borrowing for consumption is a bad idea if interest rates are high enough and the returns are low enough. But that's not always the case: consider an engineering student who can either work part-time through his undergraduate education, or borrow money for consumption and graduate a year early. That could certainly be +ROI. ~w
The recent election results in France and the developments in Netherlands seem to show clearly that it is important to trim the budget in ways that are acceptable to the voters. A voters revolt can quickly erase any gains.Still spending cannot go up forever--paid for by more and more taxes. Yet nearly every day some media report cites a need for more government funding for one program or another.Everyone seems to like the government programs they benefit from, but no one wants to pay for them.It becomes important to trim the old, outdated programs so the funds can be directed to current needs. Still there is resistance to any change in old programs. They always have their defenders.Then we have the problem of the business cycle and troughs that deplete govt income and reserves. How do you deal with those? Moderating the downside of business cycles would be a nice objective.Austerity programs won't necessarily hurt the economy provided they are finely tuned and avoid the famous excesses of the Congress.
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