There is a debate going on whether to spend our way out of the recession or practice austerity. The two most diverse countries on the subject are the United States and the United Kingdom.
The United States has been par for the course. By actually not reducing spending, and cutting taxes this past December, the United States is on pace to run a $1.65 trillion deficit for 2011, which will be a record, even surpassing the financial-crisis deficit of 2009.
The United Kingdom, meanwhile, is about to embark on a very aggressive austerity program by cutting programs and raising the VAT tax.
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Many Keynesians are scoring a victory for the United States because the United States is expected to grow at 3 percent this year — and growth for the fourth quarter in the United Kingdom turned negative and may end up negative for 2011.
However, this is the problem with government spending. When the government increases spending, it increases GDP growth as government spending is part of the calculation. If you are like me and you think the government isn't very productive, you then realize that this growth is just bogus.
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Also, there seems to be a myth that the United States can “grow” its way out of this crisis. With the huge unfunded liabilities coming down the pipeline and with the U.S. consumer deleveraging, this is unrealistic.
For example, most of the growth we have seen in corporate profits comes offshore for the huge growth we are seeing in Asia and South America.
Even if you can grow your economy, at some point you have to bite the bullet. I don’t know of any country that has the debt problems the United States has that hasn’t had to embark on some kind of austerity.
At some point, government cuts and tax increases are going to have to be embarked on. We are just kicking the can down the road and we will have to bite the bullet sometime.
Personally, I’d rather take the British route and grow at a slower pace and get my fiscal house in order upfront rather than painting my economy with fake, government-induced growth that doesn’t produce real jobs.
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