February 15, 2013
Even though the federal government is expected to run a $750 billion deficit this year, liberals continue to resist any spending cuts. Relying on Keynesian economics, they argue that these cuts would hurt the economy.
Just as deficit spending failed to spur the economy, cutting spending and reducing the budget deficit would generally not slow the economy in the near term. It may even provide a modest short-term lift while improving the economy’s performance in future years.
In the near term, reducing government spending means leaving more of the nation’s saving available for private use. In short, government’s contribution to demand falls while private demand rises. The added benefit to the economy comes from the reduction in uncertainty associated with slowing the growth in federal debt. As many now acknowledge, a main cause of the slow recovery in recent years is an oppressive uncertainty surrounding the effects of Washington policies.
Smaller deficits mean less uncertainty, which means a somewhat stronger economy in the near term. In the longer run, less deficit spending means more capital available for private investment to increase future productivity and future wages.
What do you think? Do government spending cuts threaten the economy?