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Tag Archives: spending

An interesting article today on the US government debt and how to reduce it. The debt now is 62% of GDP and growing, so there is a sense of urgency to either raise taxes or cut spending–or both.

The problem is that raising taxes is politically difficult, and cutting spending is potentially disasterous. For example, retirement funds will soon fail to cover costs, and health care costs are rising as well.

In both cases, fixing those problems without increasing revenue isn’t feasible. For one, kicking grandma to the curb is not really an option in civilized society. And making adjustments to spending will not happen overnight.

Done right, benefit changes would have to be phased in so future retirees can adjust their plans accordingly. And reducing health care costs requires systemic changes over time.

What are the real costs of high government debt? It is not really explained in the article, but we know that government debt raises interest rates which discourages investment. Higher returns can encourage foreign investment, but at some point the government will have to pay even more for increasing deficits, pushing the burden on to future generations.

Without cutting into retirement or health care, the military is the obvious choice for cuts. That is a problem in the US, but I believe that is the direction the US should consider.

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China is targeting new stimulus spending for minorities in an effort to minimize social unrest.

In a speech that is China’s equivalent of a state-of-the-nation address, Premier Wen Jiabao said the government would more than halve the increase in spending, to 11.4 percent, as it eases off the heavy stimulus that warded off last year’s global recession. Still, Wen promised hefty outlays for pensions, education, health care and subsidies for farmers to buy small cars and household appliances — all to spread prosperity more fairly.

“Everything we do, we do to ensure that the people live a happier life with more dignity and to make our society fairer and more harmonious.”

While expecting growth of 8% this year, domestic demand is falling among fears of inflation and perhaps a bursting bubble for housing prices.

“The Chinese nation’s life, strength and hopes lie in promoting solidarity and achieving common progress of our ethnic groups,” Wen said. “We need to take a clear-cut stand against attempts to split the nation, safeguard national unity, and get ethnic minorities and the people of all ethnic groups who live in ethnic minority areas to feel the warmth of the motherland as one large family.”

Perhaps surprisingly, budgets are rising more for social causes than for the military, which has expanded Chinese influence on the world’s sea lanes, presumably to ensure transport of goods in and out of the country.

Of course this all sounds positive, though the true justifications are likely more pragmatic than philanthropist. Targeting the lower classes is more likely to result in respending than if the wealthy were the first beneficiaries.

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US banks are reported today to be very hesitant in refinancing homes. When I was in school, the liquidity trap was explained to me to be a drain on savings, because the interest rate was less than the value of keeping money in your pocket, ready to spend as you please.

This also seems a sort of liquidity trap, though perhaps the terminology needs to change. Banks can also horde money, but the reason is not liquidity, but the promise of higher returns at a later date. With mortgage rates at under 5%, lowest since the 1950’s, there must be promise of higher returns in the near future.

The real question returns, why was the US bailout focused on the banking sector? It seems to have made the problem worse, with more money being withdrawn from spending, and consumers ever more hesitant to spend. They are now trying to redirect money towards job creation. A worthy policy, but why was that not the focus to begin with?

marketToday stock markets in Shanghai, Taiwan, and Hong Kong have jumped to their highest levels since October. Reasons for the jump are said to be optimism over the recovery in China and–for Taiwan–the expectation that their markets will soon be open to Chinese investment.

My own casual observations might also fuel optimism on Chinese markets. I spent Saturday afternoon in a new shopping mall near our home in Suzhou. My daughter was there to experience the big indoor playground, but first we explored the mall, got a bite to eat, watched the crowds wander by. The crowds were big. The mall has only been open a few days, and there was a light rain outside, so maybe that explains the crowds, but I was surprised to see people shopping in what is supposed to be a big economic downturn.

But were people spending money? Hard to say. They were buying snacks and paying for the kids to get in the playground, but I don’t remember seeing many shopping bags around.

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