Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago.The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.
This is perhaps one of the dumbest, most short-sighted things I have ever seen Congress do.
So -- what will this lead to? From the Financial Times:
Much like Spain, Ireland and the UK, the Baltic states were badly hit by the bursting of a credit bubble in 2008 that sent their economies into freefall and their budget deficits soaring.
While others cushioned the impact with stimulus spending, the Baltic trio plunged straight into austerity. As a result, they suffered the deepest recessions in the European Union last year, with Latvia’s economy shrinking by 18 per cent.
The region has since stabilised but, for many ordinary people it still feels like a depression. Wages have plummeted while unemployment has rocketed, with more than a fifth of the Latvian labour force out of work.
Again, let's look at the GDP equation, shall we?
C+I+(x-i)+G= GDP
C=Consumer spending
I=Investment
x-i= net exports
G=government spending
In other words, government spending is part of he equation, and always has been part of the equation.
2 comments:
I don't know what to make of this. I mean the package never seemed big enough to me to make a significant difference either way. These things have to end at some point especially when you consider that the long term employed are probably not going to find work soon. The aid to the states is the disappointing part because that means new people out of work if they let them go.
Creating a temporary boost in GDP growth by adding significant amounts of debt makes the economy worse off in the longer run if the structural problems of the economy are not addressed, and they haven't been. The US still suffers mightily from a trade deficit, dependance on oil imports, entitlements, and a lack of wage and employment growth. Right now final demand depends heavily on govt transfer payments and that is not sustainable unless corporations begin to hire en masse and increase wages and salaries substantially. If corporations did that, the economy would grow but profits would go down making equities less valuable. Note that corporations right now are making near record profit margins, and it's almost all due to govt transfer payments keeping demand in tact plus cuts in the wages and salaries. This is not sustainable and it makes no sense to continue pumping money into this unsustainable cycle.
Post a Comment