Soft on spending

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Why the U.S. Paying Down Debt Is a BAD Thing

On the surface, it seems like a great headline: America will pay down its debts in the current quarter, marking the first time in six years that has happened.

But the details are disturbing … and a sign that federal spending continues to be slashed right when the economy needs it most.

The U.S. Treasury said it expects to pay off $35 billion of debt in the April-to-June quarter. The main reason is because the previous projection was borrowing of $103 billion, and we need less than a third of that.

In a statement, Treasury said the debt payment was thanks to both higher receipts as well as lower “outlays,” but didn’t reveal specifics.

That’s probably because the specifics reveal a dark side to this theoretically sunny story; the idea of “lower spending and higher tax revenue” is an oversimplification.

Let me try my hand at it.

govtworkersSpending has plummeted because there are about 600,000 fewer government jobs since the financial crisis, as well as deep cuts to food safety and transportation programs, among others. At the same time, higher payroll taxes mean less in the paychecks of the average consumer and more in the coffers of government.

Still sound good?

Fiscal conservatives and free-market theorists have been running with the idea of austerity and cutting federal spending since the Great Recession obliterated American budgets — from governments to businesses to regular families. But this kind of thinking simply doesn’t work.

Reinhart and Rogoff have been debunked after their debt-to-GDP paper proved to be painfully inaccurate due to a spreadsheet error. Europe is in turmoil as leaders like Enrico Letta refuse to suffer “death by austerity” and are unconvinced that gutting spending and driving up unemployment further is a viable solution. In America, cuts to air traffic controllers painfully proved how some spending is crucial to a functional economy.

I’m fine with living within our means and thinking about future spending — particularly the ticking time bomb of Social Security, entitlements and aging Baby Boomers.

But cutting spending and raising taxes just to pay our debt for paying debt’s sake — even as GDP slows to a crawl and unemployment remains persistently high — doesn’t make sense. Especially when borrowing costs are ridiculously low as the world flocks to U.S. Treasuries as the safe haven of choice.

So go ahead and cheer the debt payments if you like. Me, I’m rooting for higher spending in the short-term lest the wheels fall off this sputtering recovery.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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Comments
  • OutruntheWind

    Here’s why it’s a good thing: Conservatives have been squawking about the debt and deficit so much, this will help to blunt their argument that we should cut much more.

  • Larry Smith

    We don’t need government spending…we need corporations to feel confident enough about the LONG-TERM prospects of the U.S. economy to believe that investing their ~$4 trillion in cash reserves in the U.S. would be a smart idea.

  • mhgoats1

    Think more of it like this; buying a home at three times your annual pay is affordable debt, and can easily be payed of with a typical 15-30 year mortgage. Buying one at ten times your pay, like in the boom before the bubble bust, ensures that you will have to use your credit cards to buy groceries.

    A little debt is ok, but debt causing you to decide between food, utilities, or housing is not good debt. Right now the US is choosing which one to pay.