Wednesday, September 08, 2010

Analyst: Government spending cuts will hurt economy (and stock market)

Government spending is good for our economy, as it puts money in our pockets that we can then spend on goods and services that keep us employed.

When governments cuts back, the economy slows down, in so many different ways. And when the economy slows down, even the stock market takes note.

Here are some clips from a Chicago Tribune column by Gail Marks Jarvis on Citigroup strategist Tobias Levkovich who warns that government spending cuts will reduce consumer spending (the driver of our economy).

"It could be as mundane as shaving cream," he said. People who face cuts in food stamps will continue to buy food, but might be forced to switch to a cheaper store or stretch their non-food-stamp dollars by buying generic shaving cream and making it last longer, he explained.

But Levkovich believes Xerox, which depends on government for 28 percent of its sales, could see a stressed government cut back on printing. And cuts in farm support programs "could easily affect seed companies, fertilizer sales and tractor producers with domino effect on steel or glass production.
"The multiplier effect is most probably not well understood by investors."

While the idea of government spending is unpopular, the real impact of government spending is much more so. In order to keep our standard of living high, we should increase, not cut, government spending (especially where it improves our standard of living the most with domestic programs).

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