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Cutting Spending Means More, Not Fewer Jobs

Posted By J.D. Foster, Ph.D. On February 18, 2011 @ 11:30 am In Ongoing Priorities | Comments Disabled

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The debate in the House of Representatives over spending cuts has left many observers utterly unraveled. Exhibit A: the President’s veto threat.

The core of the threat is that if he is presented a bill that cuts spending in ways or amounts he doesn’t like “while continuing to burden future generations with debt, [2] the President will veto the bill.” On this basis, apparently the President would veto his own budget proposal. According to the President, his budget [3] is full of painful spending cuts and heavily burdens future generations with rapidly mounting debt.

The President’s outside chorus has come equally unhinged. Take, for example, the claim by the Economic Policy Institute that cutting $100 billion from the President’s budget request for fiscal year 2011, as the Republicans originally pledged, would destroy 994,000 jobs [4]. If this were true, then we would truly be as addicted economically to a rapidly growing budget as President Obama’s recent budget suggests. If this were true, we could never slow the growth in government. If this were true, then we would be doomed.

Fortunately, it’s not true. It’s not even wrong as a matter of exaggeration. Cutting spending now is probably the most pro-jobs policy Congress can enact quickly, especially given the budget deficits we now face.

The issue is ultimately straightforward: The President and his allies suggest that one can stimulate the economy through increased deficit spending. The notion is to increase total demand by increasing government demand. If this worked, then the fiscal surge of the past two years should have been sufficient to put the economy into overdrive. It didn’t.

As the Administration has repeatedly tried, one can misuse sophisticated economic models to demonstrate that increased deficit spending stimulated the economy. This folly is reminiscent of the joke about the economist stuck on a deserted isle with nothing but canned food to eat and no can opener. When asked how he survived, he replied, “I assumed a can opener.” These models assume that deficit spending is stimulative, so, of course, that’s what they show. I may assume I can outrun Olympic sprinter Usain Bolt. But my assumption doesn’t put me on the victory stand complete with flag and national anthem.

Curiously, if the Administration really believed its own theory that the spending stimulus boosted the economy, then the President’s own budget would put him in a state of raw panic. According to his figures, the deficit declines as a share of our economy from a record 10.9 percent in 2011 to 4.6 percent in 2013. By their theory, this represents a power blast of fiscal restraint portending almost sure recession. Either they do not believe the deficit forecast they released February 14, or they do not believe in demand-side stimulus. They can’t have it both ways.

As I testified [5] before a House of Representatives Oversight Subcommittee earlier this week, demand-side stimulus has failed, as it always does, because the theory conveniently excludes the inconvenient truth that deficits have to be financed by borrowing, and by government borrowing more there is less saving left in the economy for the private sector. So government spending goes up, private spending goes down, and total demand is shifted but not increased.

What the economy needs now is relief from Washington’s predations and relief from Washington-created uncertainties, foremost of which derives from the record budget deficits expected under President Obama’s policies. Cutting spending and thereby restoring our nation’s fiscal house provides credit markets some assurance that the United States government intends to change course before crashing headlong into financial reality, and it provides taxpayers some assurance that they won’t be asked to pay for Washington’s excesses.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/02/18/cutting-spending-means-more-not-fewer-jobs/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/spending-cut1.jpg

[2] while continuing to burden future generations with debt,: http://www.politico.com/news/stories/0211/49603.html

[3] his budget: http://www.whitehouse.gov/omb/budget

[4] 994,000 jobs: http://www.epi.org/analysis_and_opinion/entry/righting_the_fiscal_ship_the_wrong_way/

[5] testified: http://www.heritage.org/Research/Testimony/2011/02/Why-the-Demand-Side-Stimulus-Failed

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