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Federal budget cuts: Impact and implications

Speaker:
Darrell Spence
Title:
Economist
Based in:
Los Angeles
Investment experience:
21

DARRELL SPENCE: In terms of fixing the federal deficit or the federal budget problem, what the U.S. has going for it is the luxury of time. The one thing I don’t think you want to do when you’re trying to solve these types of issues is to make draconian and very drastic cuts over a short period of time. Rather, you want to smartly solve the problem over the intermediate to longer term time frame.

The more dramatic or drastic the cuts are, the bigger negative impact they have on the economy, and it almost makes fiscal austerity self-defeating. You drag the economy down so much that it goes into a recession, and that actually makes your deficit situation worse.

And if you want to see real life examples of that, you need to look no farther than some of the peripheral European countries, which are doing just that. They implemented significant fiscal austerity, and it’s not necessarily working, because it’s having such a negative impact on their economies. The reason they had to do that was they ran out of time. The market all of a sudden decided that they would not lend to these countries anymore, because they were concerned about these countries’ ability to repay that money.

The U.S. is not in a similar situation. Our debt ratios are not nearly as high as some of the peripheral European countries’ debt ratios are. We still have market access, and we’re still the world’s reserve currency. So we have all of those things that suggest we’re not about to hit the wall, say, that some of the peripheral European countries did.

We do have to ultimately deal with this, but we’ve got, again, the luxury of time, which will allow us to deal with it over a longer period of time — which is actually the preferred way to go about doing deficit reduction and solving the fiscal issues.


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