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Thread: Economy's Biggest Drag Right Now Is Government

  1. #71
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    Re: Economy's Biggest Drag Right Now Is Government

    The article basically confirms standard economic thought. In the short-run, increased government spending generally provides a boost to economic activity, while decreased government spending generally provides a drag. The handoff from government support for the economy to the private sector is underway now. The transition will likely have some bumps and the private sector will need to fill the role being vacated by the government (impact of the slow withdrawal of government support for the economy). Beyond the U.S., one is also witnessing the same dynamic at play where austerity has slowed economic growth in Europe, even leading to renewed economic contractions in Spain and the UK.

    These developments do not mean that in the long-term high government spending can't have adverse consequences. If government spending is so high that it leads to a rapid build-up of debt relative to the size of the economy, the long-term impact can be negative. The harshest and most immediate impact occurs in countries with low debt intolerance.

    In part, austerity became necessary (with its short-term pain) for some of the European states on account of a secular and structural rise in government debt relative to GDP. The UK acted preemptively to avoid a confidence in crisis. Greece failed to act adequately and plunged into a debt crisis. The U.S. faces growing debt-related risks though the timing differs on account of its current position and very high degree of debt intolerance. The U.S. is confronted by long-term imbalances that are increasing the need for medium- and long-term fiscal consolidation. Fiscal consolidation is not and cannot be painless. It will lead to slower short-run economic growth and the consequences of reduced short-term growth. The goal of fiscal consolidation is to make the longer-term more attractive for sustained and robust growth, by reducing the debt burden that would otherwise accumulate and sap growth, perhaps feeding back to even faster growth in debt. A continuation of the present lack of commitment to fiscal consolidation in Washington will likely increase the need for more robust and painful austerity measures at some point in the future. The U.S. has very high debt intolerance, but there is a limit.

  2. #72
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    Re: Economy's Biggest Drag Right Now Is Government

    Quote Originally Posted by donsutherland1 View Post
    The article basically confirms standard economic thought. In the short-run, increased government spending generally provides a boost to economic activity, while decreased government spending generally provides a drag. The handoff from government support for the economy to the private sector is underway now. The transition will likely have some bumps and the private sector will need to fill the role being vacated by the government (impact of the slow withdrawal of government support for the economy). Beyond the U.S., one is also witnessing the same dynamic at play where austerity has slowed economic growth in Europe, even leading to renewed economic contractions in Spain and the UK.

    These developments do not mean that in the long-term high government spending can't have adverse consequences. If government spending is so high that it leads to a rapid build-up of debt relative to the size of the economy, the long-term impact can be negative. The harshest and most immediate impact occurs in countries with low debt intolerance.

    In part, austerity became necessary (with its short-term pain) for some of the European states on account of a secular and structural rise in government debt relative to GDP. The UK acted preemptively to avoid a confidence in crisis. Greece failed to act adequately and plunged into a debt crisis. The U.S. faces growing debt-related risks though the timing differs on account of its current position and very high degree of debt intolerance. The U.S. is confronted by long-term imbalances that are increasing the need for medium- and long-term fiscal consolidation. Fiscal consolidation is not and cannot be painless. It will lead to slower short-run economic growth and the consequences of reduced short-term growth. The goal of fiscal consolidation is to make the longer-term more attractive for sustained and robust growth, by reducing the debt burden that would otherwise accumulate and sap growth, perhaps feeding back to even faster growth in debt. A continuation of the present lack of commitment to fiscal consolidation in Washington will likely increase the need for more robust and painful austerity measures at some point in the future. The U.S. has very high debt intolerance, but there is a limit.
    Nice reasonable explanation.

    AUSTAN GOOLSBEE: I think the world vests too much power, certainly in the president, probably in Washington in general for its influence on the economy, because most all of the economy has nothing to do with the government.

  3. #73
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    Re: Economy's Biggest Drag Right Now Is Government

    This is what they won't report on Fox News and RW Radio... the biggest drag on economic recovery and the general healing of our nation during the last 4 years...

    Inside the Worst Congress Ever

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