Spending Cuts Will Do No Harm

The idea that the federal government needs to cut spending may seem self evident in light of the nearly $1 trillion deficit it is estimated to run this year and in light of our nation’s $16 trillion debt.  Unfortunately, some politicians refuse to look to history to see which policies have failed us before.

Just because they enjoy beating their heads against the wall, it doesn’t mean we should have to as well.

There is a better path for America.

The Heritage Foundation’s J.D. Foster explains that budget cuts will not harm the economy.  While there is apparently a broad consensus on deficit reduction, there are drastically different views among representatives of Congress on how to reduce the deficit. 

Some fear that reducing the budget deficit too rapidly might weaken the economy, but they are mistaken.

The truth is, deficit spending does not spur growth.  Foster reminds us what happened in 2008.  The economy slid into recession and Presidents Bush and Obama both resorted to massive deficit spending in an attempt to sustain and artificially stimulate the economy.

Their efforts failed because they were based on flawed Keynesian economic theory.  Foster explains:

The theory fails because it relies on the unstated fantasy government can magically create demand out of thin air. In fact, government must borrow to finance deficits, and all borrowing subtracts from the funds that would otherwise be available and used in the private sector for private investment or private consumption. While budget deficits most certainly increase demand, the borrowing necessary to finance those deficits must dollar-for-dollar reduce demand. The net effect is more government debt but not more total demand and certainly not more jobs.

President Obama attempted to spur the economy again in 2009 and 2010, failing miserably both times.  Can you venture to guess why?  His policies were, again, based on flawed economic theory.

If deficit spending fails to spur the economy, the opposite of that — cutting spending and reducing the budget deficit — would not slow the economy in the near term, and in fact, it may even provide a modest short-term lift, Foster adds.   Reducing government spending means leaving more of the nation’s savings available for private use.  The one caveat he gives is that spending reductions can have a “shock” effect, when spending cuts are sharp and unexpected, but “this effect is fleeting because the economy will quickly adjust to the new level of spending.”  And to be clear, there is nothing unexpected about the forthcoming sequester which was passed in August 2011.

What is to be done, then, and what is best for the economy in the short term and long term?

We must follow a path to balance.  Projected federal budget deficits are a massive threat to America’s future.  Failing to get our country on a path to balance within 10 years is an immoral injustice to all Americans, especially young people, who will bear undue financial burdens and a shattered economy.

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