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Business

August 3, 2010

Economic theories and how they affect you

You are a victim of the fight between competing economic theories: Should governments spend more or should they reduce their debts?

While you may view this fight as the old political dialectic between Republicans ("less government") and Democrats ("more government"), the competition is global. The outcome of this struggle will affect everybody worldwide. How the struggle is resolved in the U.S. alone will not predict the outcome for Americans.

One theory holds that we — Americans, Europeans, Chinese — should spend our way out of the present recession and economic malaise, even at the cost of incurring additional debt. The only way to dispel the malaise and stimulate the economy is for the government to spend, whether through extended unemployment benefits or public-works projects on infrastructure. The last round of stimulus spending prevented a collapse but barely put us back on course.

The other theory holds that government overspending is reckless, gives excessive power to the government and is unproductive. The increased debt burden from deficit spending becomes a tax on the future and future generations, leading to more government control.

To reduce government deficits now, without taxation, programs would have to be cut. Most people can clearly see that a cutback in government spending will only exacerbate the malaise now and further impede any potential recovery.

Up until recently, the theory of stimulus spending has held sway in the U.S. But we Americans appear to have reached a stalemate over added stimulus and have resisted extending unemployment benefits. Alternatively, many members of the European Union have adopted the more restrictive policy of cutting programs back to cut deficits.

If you are an investor, Europe looks like a no-growth place in the near term and the U.S. a slow-growth place. As an investor, you have to wonder why all of the hundreds of billions of dollars sitting in private hands and private corporations are not being put to use. Or why governments are not providing special incentives to free all of this unproductive capital.

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