Cutting Budget Deficit Lowers Growth, Raises Unemployment in the Near-Term

Discussion in 'Economy' started by Toro, Aug 21, 2011.

  1. Toro
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    Toro Diamond Member

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    But raises output and lowers real interest rates over the long-term. Also, lowering the deficit through tax increases is typically worse than by cutting spending.

    For those who don't want to read the paper or the exerts below, the conclusions are as follows;

    • Cutting the budget deficit will lower growth and raise unemployment over the next 1-2 years. The effects of cutting the budget deficit is to raise the rate of unemployment by 0.3% over two years.
    • There is no stimulative effect from cutting the deficit.
    • Cutting spending has a less negative effect than raising taxes. However, other policy responses - such as lowering interest rates - mitigate the effects of cutting spending.
    • Cutting different types of spending has different responses. Cutting wealth transfer, i.e. unemployment insurance, has little if any effect, and may be positive. Cutting government consumption, i.e. firing government workers, has a negative effect. Cutting government investment, i.e. infrastructure or education, has the greatest negative effect.
    • Cutting the deficit when interest rates are at or near zero most likely has a much worse effect than when interest rates are higher.
    • Though negative in the near-term, cutting government spending is beneficial long-term because it lowers interest rates and lowers taxes.

    http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf
     
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    Last edited: Aug 21, 2011
  2. Old Rocks
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    Old Rocks Diamond Member

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    Yet, if the cutting spending approach is taken, it will be done on those very areas that have the greatest negative effect. That is already the stated intention of one of the parties.
     
  3. KissMy
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    KissMy Free Breast Exam

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    Basically we have so much credit contraction that that it will take a negative 7% interest rate to make the economy grow. Since negative interest rates not possible the only thing we can do is weaken the currency by creating 7% more debt annually.
     
  4. iamwhatiseem
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    iamwhatiseem Gold Member

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    So what we are really saying is we are in between a rock and a hard place.
    No matter what the government does, cut taxes ir raise them...spend more or spend less...the end result is the situation worsens.
    Well...you guys didn't know this prior to the recession? I can't believe that those that have posted in this thread..that I am somehow the only one that knew the economic flush was bound to drain. I have been saying since the late 90's that this country is in real trouble. I knew we had an unsustainable economy based on insane consumer spending levels financed by cheap debt. In essence, the population was spending their future income...spending more than they made.
    The day finally arrived where people can't borrow what they use to...so....we have substantially less money in the system where many, many people haven't received pay increases in 3-4 years - or more.

    I have struggled to find a way to fix the problem. But, I don't see any solution other than allowing the system to reset...which will indeed be painful, but the only way to solve the problem without creating a bigger one in it's place.
     
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  5. Quantum Windbag
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    Quantum Windbag Gold Member

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    Thanks for not reading the article Toro posted and making an unintelligent response.
     
  6. editec
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    editec Mr. Forgot-it-All

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    Cutting spending in this economy makes as little sense as increasing taxes.

    This economy is starved for CASH.

    Jesus, how much simpler can one state it?
     
  7. KissMy
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    KissMy Free Breast Exam

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    We can cut spending in areas such as government pensions, medicare, prescription drugs, unemployment, welfare, social security etc with little negative effect. Those savings along with more deficit spending can be used to subsidize hiring the unemployed to build new high tech infrastructure such as fiber to every home & smart electricity grid. Build more oil, gas & ethanol pipelines & build more wind farms.

    Do away with the energy efficiency tax credit & go with direct energy efficiency payments. Half of the country pays no taxes so a $2,500 energy tax credits do no good unless you have to pay that much or more in taxes. Rather than giving a deduction of $80 per window & door replaced with energy saving ones, pay people $80 bucks for every one they have replaced. Do the same for wind & solar.
     
  8. Trajan
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    Trajan conscientia mille testes

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    of course initially there will be some pulling up short- as ALWAYS in ANY economy good or bad, when the federal tap is squeezed, there will be an effect.


    I read the article Toro, no offense and you didn't write it but it sounds to me like they tried to cover every base possible yet as Iamwhatitseems inferred, and I will say straight out, everyone is smart after the fact, covering every base, and looking at the contributors and artilces and orgs they took it from, well....;)....*shrugs*

    As I posted , Dimon over at JPMorgan Chase, the more bullish of the crew has now basically thrown in the towel, the gdp for the next 3 quarters into March 2012 will average between his and Goldman's predictions on the rosy side- 1.5%.........

    so, raise/ lower taxs, cut spending, don't....

    here - broaden(loopholes closed, flat tax rate) , drop the corp tax rate to 15%, commit to the bush cuts for 5 years and as far as gov. spending , NO cuts BUT, NO BASELINE increases, for 5 years. period full stop.
     
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    Last edited: Aug 21, 2011
  9. Trajan
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    Trajan conscientia mille testes

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    The M2 is fine, better than fine, that aint it.
     
  10. KissMy
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    KissMy Free Breast Exam

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    I've got a lot of gold, farm land & houses, so I would love to see the Keynesian's go crazy.
     

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