Europe cuts deep, the U.S. spends on

uk_debt.gi.top.jpgA truck driving past Parliament in London displays Britain's national debt. By Paul R. La Monica, editor at large


NEW YORK (CNNMoney.com) -- The British are cutting! The British are cutting! Should the United States do so too?

Now that the United Kingdom has decided to use an ax the size of Big Ben to hack away at its budget, the United States stands out among the world's leading economic powers for trying to spend its way out of the downturn.

paul_lamonica_morning_buzz2.jpg

"The U.S. wants economic growth at any and all costs," said Axel Merk, president of Merk Mutual Funds, a Palo Alto, Calif.-based money manager specializing in currency investments.

That's a stance that many economists are growing increasingly worried about -- especially when you consider that the United States has about a $13 trillion debt load and is projected to have a record-high $1.56 trillion budget deficit in fiscal 2011.

This may be a bone of contention at the upcoming summit of so-called G-20 nations in Toronto this weekend.

"There has to at least be a plan for the U.S. being fiscally sustainable. It's amazing that we're lecturing Europeans on how to run their economy," said Thomas Cooley, a professor of economics with NYU's Stern School of Business. "Europe is at least addressing its problems even though there is pain associated with that."

There are several reasons to be worried about current U.S. fiscal and monetary policy. Merk said that his biggest fear is that the United States is boxing itself in a corner and feeding potential inflation by issuing lots of Treasury debt and keeping interest rates low.

He said that there is a risk that foreign investors could tire of the low returns from U.S. debt. If that happens, bond yields could quickly spike higher if investors sell Treasurys and move to other assets.

Mounting deficits could also eventually lead to a credit rating cut for the United States -- although most experts believe that's years away from happening.

Still, following the lead of Britain, Germany and the debt-laden PIIGS of Europe may not necessarily be the best solution either. Any budget cuts, particularly if combined with tax increases, could do more harm than good.

Yes, fiscal austerity by its nature has to hurt. That's not a reason to put off budget cuts. But going too far could kill off any chances of an economic recovery.

"This is the irony of tightening fiscal policy now: It balances the books, but it subtracts from near-term prosperity," wrote Carl Weinberg, chief economist with High Frequency Economics, a research firm based in Valhalla, N.Y., in a report Tuesday.

The biggest problem with any series of spending cuts and tax hikes is that it could make the U.S. job market even worse.

With the unemployment rate still hovering close to 10% nationwide, some think it's tough to justify severe budget cuts now.

"The economy is still struggling. There is not enough growth in the near-term to get the unemployment rate down," said Jeffrey Bergstrand, a professor of finance with the Mendoza College of Business at the University of Notre Dame. "A focus on trimming the deficit is not likely to happen anytime soon."

Bergstrand argues that the United States should not issue a new round of economic stimulus, but that it should resist calls to make battling the debt load and budget deficit a priority.

He said as long as the United States does so, the chances of a quicker economic recovery are probably greater here than in Europe. And he added that the United States has the luxury of time to tackle long-term debt concerns since inflation is not yet a real worry.

"The deficit problem won't solve itself. But we can procrastinate. Even though we are borrowing a lot of money, interest rates are still low and the dollar is not weak. That buys the U.S. time," he said.

Barry Ritholtz, the CEO of Fusion IQ, a research firm based in New York, agreed. He said that while the United States shouldn't ignore the deficit, this is the worst possible time to shift gears and label it public economic enemy No. 1.

"Reducing spending and raising taxes now would be counterproductive," he said. "I don't have a problem with fixing the deficit. But the way you do that is by raising taxes and pulling back spending during economic booms."

- The opinions expressed in this commentary are solely those of Paul R. La Monica.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.95%3.98%
15 yr fixed3.08%3.04%
5/1 ARM3.43%3.30%
30 yr refi4.04%4.05%
15 yr refi3.17%3.11%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,195.42 221.11 1.30%
Nasdaq 4,566.14 16.91 0.37%
S&P 500 1,994.65 12.35 0.62%
Treasuries 2.30 -0.02 -0.77%
Data as of 12:01am ET
Company Price Change % Change
Facebook Inc 74.11 -1.75 -2.31%
Bank of America Corp... 17.03 0.04 0.24%
Intel Corp 32.58 -1.34 -3.95%
Avon Products Inc 9.97 -0.99 -9.03%
Apple Inc 106.98 -0.36 -0.34%
Data as of Oct 30

Sections

'Chevy Guy' Rikk Wilde became a viral sensation bumbling his way through a World Series presentation Wednesday night. More

An annual federal government census found about 578,000 homeless individuals nationwide, down about 2% from last year. More

Microsoft's new Band smartwatch claims to make you a better human, and to know you better than you know yourself. More

San Francisco-based Tumml is an accelerator fostering 'urban impact start-ups' that aim to tackle civic problems -- and turn a profit. More

Amy Kukec thought leaving her abusive husband would be the beginning of a new life, but so far she's hit one debilitating financial roadblock after another. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.