Cutting Spending Might Not Grow the Economy

More

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.

Jump to comments
Presented by

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

Get Today's Top Stories in Your Inbox (preview)

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

What makes a story great? The storytellers behind House of CardsThis American LifeThe Moth, and more reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In