Austerity v. Stimulus: Why Neither Side is Right

We have an unfortunate economic situation on our hands that, while I do believe the worst has passed, is nowhere near being solved.  With a near 10% unemployment rate, that means we have approximately 15 million people in this country who are unable to find work.  You can see the stats as they are compiled by the Bureau of Labor Statistics by clicking this link.  We also have a rising debt load that threatens the prosperity of future generations.  While I am not normally someone who likes to get into policy debates, it seems that every economist, professor, investor, plumber, school teacher, and song writer, has an opinion on how the government should address this issue, and therefore I feel compelled to jump into the fray….in a sense.  What I would like to do is briefly sum up both sides of this debate, and then state why I feel its a fools argument to begin with.

Austerians:  The Economic Spartans

Austerians are those that believe the debt level of the United States is currently unsustainable.  The government borrows too much money and will very soon find itself in a position where willing lenders will be hard to come by.  Confidence will erode, bond prices will plummet as yields skyrocket, and economic armegeddon ensues.  This is the dramatic crash into a deflationary spiral which I wrote about a few weeks back, in the Lost Decade article.

The answer to this problem is very clear to the Austerians.  Slash spending immediately.  Take a hatchet to the budget and reduce the deficit through painful but needed cuts.  They believe we need to ratchet back our standards of living and live a more “Spartan” lifestyle.  This is really the only responsible thing to do after all.  Currently the U.S. is spending about 10% more than it earns in tax revenue.  Obviously if you spend more than you make you will max out the credit cards, home equity lines, and bank loans eventually, and then what do you do?

Stimulants: The Economic Crack Dealers

The Stimulants (for lack of a better term) believe that the only way to get people back to work is through stimulative actions on the part of the government.  This means more spending.  This means increasing an already high deficit in the budget and thereby increasing the U.S.’s overall debt load.  Their rationale for this is that the economy will continue to falter without some sort of meaningful job creation and job creation can only come when we have money moving through the system.  This means banks finally agreeing to lend money to small and mid-sized business so that they can expand their operations, and it means consumers not worried about losing their jobs through employers having to enact cost cutting measures.

Without this additional spending from the government, the fear is that prospects for growth in the United States will continue to decline.  Investors in the equity markets will continue to pull their money out of the U.S. stock market in search of higher potential growth prospects elsewhere.  Even though it is acknowledged that loose credit standards and high degrees of leverage is what got us into this mess, the thought is that cutting off an addict too abruptly can have disastrous effects.  The Stimulants (pun somewhat intentional) believe it is better to ween ourselves off of the borrowing addiction.

Who is on what side of the aisle?

For a great summary of this debate from some of the more respected residents of each camp, check out this article from the Financial Times.  I encourage everyone to check this out and read more in depth to each participants’ view points.  These are all very intelligent and successful players in the global economic scene with widely varying viewpoints.

Conclusion:  The Winner is…..Neither!

The only true winners in this debate are those that argue against this argument.  The problem is that the issue is far from black and white.  The participants in this debate are arguing past one another, and neither side is nailing down the issue in that we need to find a way to do BOTH!  I have been surprised at some of the people who have emerged with this viewpoint.  Primarily Larry Summers, the director of President Obama’s Economic Council.  I suppose it stands to reason that someone who is actually in the game, making decisions, can see the issue for what it is, instead of all these professors and economists playing armchair quarterback!

Can we find a way to stimulate the economy and balance the budget at the same time?  This is the challenge faced by the administration.  The solution will involve implementing smart policies that get the most “Bang for the Buck” in creating jobs, while at the same time eliminating wasteful spending.  We need to be selectively Stimulative and Austere.  Unfortunately, I’m not sure we can execute on this task.  Congress, right now, is more polarized than at any point in our history based on voting records of the last couple years.  Combine this with the fact that everyone in the government and the private sector alike will have different opinions on what spending programs can and should be eliminated, and its hard to see how we get this accomplished.

The bottom line is that temporary spending programs to get people back to work accompanied by a legitimate plan to get the budget balanced over time, is the only way to sustain economic growth while retaining the confidence of the bond market.  Again, my ties are with the entrepreneurs of this country and the small and mid-sized business owners.  This is the innovative soul of American business that can lead us out this malaise.

Let me hear your thoughts on the matter.


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