Cutting Spending Might Not Grow the Economy

Tyler Cowen praises David Brooks' column today on how cutting spending can lead to economic growth. Cowen says "just about every paragraph is excerpt-worthy." I agree, but I also think just about every paragraph is contentious. For example:

In times like these, deficit spending to pump up the economy doesn't make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn't induce small businesspeople to hire and expand. It scares them because they conclude the growth isn't real and they know big tax increases are on the horizon. It doesn't make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.

Is it possible that deficit spending is scaring consumers and small businesses? Absolutely. Confidence in a nation's finances impacts business decisions. Is it also possible that 16 percent underemployment, a slow consumer recovery following massive debt overhang, a devastated real estate market, and a stock market swaying to the rhythms of a wobbly euro zone is also scaring consumers and small businesses? Absolutely. Brooks doesn't mention it.

Brooks is excited at the idea that cutting spending to reduce debt burdens during recoveries can lead to economic boom times. Is it possible that pruning discretionary spending can act as an economic stimulus? Absolutely. But there are so many factors in a recovery besides government spending levels. Consider Sweden, whose remarkable escape from debt in the 1990s -- which included both significant tax increases and spending cuts -- was chiefly driven by exports that coincided with the U.S. consumer experiencing one of the greatest economic runs in modern history. The spending cuts might have helped. But exports might have helped more.

I say might because I don't know the level of government spending as a percentage of GDP that maximizes economic prosperity. It's important to highlight research that finds that spending cuts can lead to lasting economic recoveries, but it's also important to acknowledge that economics is a multi-variable game and what worked for small European countries in the 1990s might not work for the world's leading economy in the 2010s.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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