Is it ok to just cut and not spend during slow economic recovery?
During slow growth in an economy like the US is experiencing right now (2012), is it more a viable option to inject money into the economy (i. e, stimulus) or focus more into drastic saving measures and cutting spending?
It makes no sense for an economy to engage solely in cost cutting. Government spending accounts for slightly less than a third (around 30%) of the total GDP of the USA, and the majority of this amount can be attributed to direct transfers from taxpayers to corporations in the form of government contracts/ subsidies. Provided that these transfers are cut by say 5 % this would trigger an immediate recession, since both public and private sector jobs will be lost, contracts will be terminated and the multiplier effect will take over and cause a cascade in every direction. Investment in infrastructure and R&D, education and healthcare on the other hand will most definitely trigger a recovery and also increase the long term competitiveness and efficiency of the economy as a whole.
Yes, absolutely. The only way the economy will truly recover is thorough saving and investing. Look at the post-WW II years. Keynesian economists predicted a return to the Great Depression after the War. Yet what happened was the greatest economic boom in world history. While savings wasn't the only reason, business boomed during that time, it was the catalyst that started it. How did this happen? During the War you were one of two people on America: fighting the war or having things rationed on the homefront. Either way you really weren't spending any money. After the war and the boys returned home and rationing was lifted, that money had to go somewhere. It was invested in business and things boomed.
That's not to say that we should replicate that today. What we should do is eliminate those things that penalize savers (inflation and the organizations which cause inflation) and benefit spenders (central banks).
It's folly to think that public sector spending will cause a recession or depression. We cut the size of government after WW II by something on the order of 50% and things boomed. There was a period of adjustment that lasted about a year, but nothing like the former decade of the Great Depression.
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