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Robert Barro: More Government Crises Coming

Sunday, 07 Aug 2011 11:09 AM

Economist Robert Barro says the debt ceiling was only the beginning -- more government crises are on the way to damage the struggling economy.

"President Barack Obama's administration has consistently overestimated the benefits of stimulus, by using an unrealistically high spending multiplier," Barro writes in the Financial Times. "According to this Keynesian logic, government expenditure is more than a free lunch."

"The elimination of the temporary spending is now contractionary and, more importantly, the resulting expansion of public debt eventually requires higher taxes, retarding growth."

Barro agrees that budget deficits were appropriate during the great recession and, for that reason, the kind of balanced-budget rule currently proposed by some Republicans should be avoided.

“However, since government spending is warranted only if it passes the usual hurdles of social rates of return, the fiscal deficit should have concentrated on tax reductions, especially those that emphasized falls in marginal tax rates, which encourage investment and growth,” Barro says.

Barro believes there will be calls for further stimulus for America's economy. "This would be a grave mistake," he says. "In the financial turmoil of 2008, bailouts by the U.S. and other governments were unfortunate, but necessary."

"However, the subsequent $800 billion American stimulus package was largely a waste of money that sharply enlarged the fiscal hole now facing our economy."

Many other experts also warn of darker times for the U.S. economy.

Financial guru Robert Wiedemer tells Newsmax that the American economy is facing a double-barreled threat — a recession is “absolutely” coming and inflation will be the “biggest problem” of all.

Wiedemer, managing director of Absolute Investment Management and a contributor to Newsmax’s Financial Intelligence Report and Moneynews, attributes Thursday’s stock market plunge to the government’s ending of quantitative easing — printing money to buy securities in an effort to fuel economic growth.

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