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Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Monday, July 5, 2010

The Debate on How to Fix Our Economy

With the Dow Jones Industrial Average (DOW) now back under 10,000 and the last unemployment report showing little progress on the creation of jobs, one can’t help wonder what it will take to accelerate the recovery. There’s more and more talk of a double dip. With interest rates basically at zero, it doesn’t seem that the Federal Reserve has many options available, should a double dip occur.

The thought has occurred to us that with all the uncertainty about the crisis in Europe, unprecedented deficits, high unemployment, Gulf of Mexico oil spill, new healthcare plan, pending financial regulation and specter of higher taxes, the key element that is holding back the economy may well be lack of confidence in our government, at all levels.

From an economic point of view, the argument seems to focus on whether one believes in a Keynesian approach to the problem or the Alesina approach. Who is Alesina you ask? An article in the July 5 –July 11 issue of Bloomberg Businessweek titled “Keynes vs. Alesina. Alesina Who?” tells us that Alberto Alesina is a professor of economics at Harvard University. According to the article, Professor Alesina “disputes the need for government spending to prop up growth and advocates spending cuts, instead.” In short, he disagrees with famed economist John Maynard Keynes, who would have us stimulate the economy via government spending.

According to the article, “Alesina argues that austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment. In addition, he says, deficit-cutting reassures taxpayers that more wrenching fiscal adjustments won’t be needed later. That revives their animal spirits and their spending.”

Whether Alesina is right is difficult to say. Obviously, according to the article, the Keynesian economists don’t think he is. Yet, the Keynesian approach so far, with our government’s large stimulus package, seems to have had mixed results. To restore confidence in our economy, Alesina’s approach seems to have merit. More spending, higher deficits and looming new taxes have everyone on edge. The European governments seem to agree that cutting spending is critical. And, we fear that cutting deficits via tax increases will do little to spur the economy. Hopefully, Congress will choose the right path to recovery.


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