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July 19, 2010

Growth versus frugality

Economic policymakers in most countries, including the United States, are facing a trade off. Do they continue to support the struggling economy through more government spending, or do they cut spending and focus on reducing debt. Is there an easy answer?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"No, there is really not. ... And this question always comes up after we have been in a recession, because one of the standard policy prescriptions for a recession is for a government to step in and spend money. However, to do that they usually have to borrow money, so it is very typical during recessions for government debt to be built up. This recession has been no exception.

"But we all know that there are some negatives to larger government debt: There is a lot of evidence that suggests that larger government debt results in the economy growing more slowly. So at some point, government policymakers have to say, 'Alright. Is the economy strong enough to sort of pull it off life support from the government, let it go on its own and then let's now focus on getting the debt situation under control?'

"And it looks like we are at one of those crossroad decision points now. And as you might expect ... we have divided opinion depending on how you assess the economy and how you assess the risk of more government debt. Some say, 'No, the economy is not yet strong enough to be on its own.' Others say, 'Yes, it is and we need to focus more on debt.'

"There is not an easy answer to this, but it certainly is a very important question."

Posted by deeshore at July 19, 2010 08:42 AM