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Strategies & Market Trends : The Residential Real Estate Crash Index
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From: tejek7/14/2010 3:00:23 PM
of 306849
 
Austerity, Growth and Politics

7/14/2010 8:30 AM EDT

It is always disappointing when I hear politics color someone's view of the economy. The economy is neither conservative or liberal. It just is. Take for example the debate over whether governments need to enact austerity measures now, or whether governments would be better off continuing to stimulate their economies through deficit spending. In the U.S., it seems that if you have a "R" on your voters card, you are more likely to side with the former. The "D" voters seem to favor the later.

Looking at it objectively, the debate becomes a little clearer. GDP growth is a function of Consumption + Investment + Government Spending + Net Exports (C + I + G + X). We know that any funded increase in government spending becomes a 1 to 1 transfer from either C or I into G. So only deficit spending can actually increase the sum of the equation.

However consumers aren't foolish. They know that continued government stimulus eventually has to be funded. That is why there are diminishing marginal returns to ever increasing government spending. Consumers assume they need to sock away money (neither spending it nor investing it) to pay for future tax increases.

The only time deficit spending is likely to have a large stimulus effect is when consumers are already refusing to both spend and invest. This was the case in late 2008 and early 2009, so at least there was good economic logic to a large stimulus package. But today we are seeing slow but meaningful growth in consumer spending. So the need as well as the effectiveness of continued stimulus is questionable.

That being said, lowering "G" will decrease GDP. The U.S. government can afford to lower G slowly and minimize the economic impact. Europe isn't so lucky.
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