Economic Commentary: Stimulus Goes Away

The End of Stimulus

Not unexpectedly, the shrinkage of government will represent a major drag upon the economy during the next few years. This follows a period in which we experienced major economic stimulus from tax rebates, massive grants and the spending associated with two wars. State and local governments are facing huge deficits and one-by-one austerity plans are cutting jobs and programs or raising taxes. However, these deficits pale when compared to the shortfall the Federal government is facing. The President’s proposed budget cuts and revenue enhancements run the gamut from small businesses to housing counseling programs. And that is just the first salvo. Congress has lined up hundreds of bills, many of which propose to cut much further.

Let’s advance a couple of points here. First, with the economy entering a stronger recovery phase necessary to reduce unemployment, to keep that momentum going the economy must overcome a second significant factor besides housing — the shrinkage of government. However, there is no choice. Lack of action would result in higher rates that would constrict the recovery even further. Think of the situation as the government getting out of the way so that the economy can expand after the government has helped business up to their feet during the fiscal crisis we experienced. Second, as severe as these cuts sound, they don’t even represent a significant dent in the long-term deficit picture. That is because the vast majority of the budget can’t be changed by simply cutting spending or raising a few taxes. Social Security, Medicare, interest on the debt and non-war defense spending, including homeland security, take up too large a percentage of the budget for the other cuts to be effective. That means the government must make some really hard choices, including raising revenue, in order to solve the problem. In other words, an immediate cut in spending is a necessary first step, but it is only one step. The government faces a very important and difficult balancing act comprised of cutting and preserving the recovery.


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