Austerity Crisis Is No Crisis

Posted by Jeff Carter
on November 14th, 2012

Over and over, I am hearing different people repeat the mantra that if we cut government spending we are headed for recession. I think they are wrong. One of the reasons they are wrong is that they believe in pump priming. Too many people in the US were taught the John Maynard Keynes system of macroeconomics. IS-LM curves and the rest.

They should forget it. It doesn’t work.

If increased spending lead to economic gain, we’d have a rip roaring economy right now since we added four trillion to the deficit. Japan would be in great shape and so would Greece.

Government spending adds very little oomph to the economy. Those dollars are borrowed from somewhere else, or the money is found through taxing someone else. Taking a dollar out of this pocket and putting it another isn’t an increase in GDP-it’s simply moving money around or in some cases wealth redistribution.

The kind of spending cuts that need to happen are twofold. One is reform of entitlements. We spend way too much on things like defined benefit government pensions and cost of living increases. The pension issues aren’t going to be solved in the next three weeks. But they need to be solved in the next four years because we are going broke supporting retired government workers.

The kind of cuts that can be made right away look like this. Suppose next year, the budget for education is scheduled to rise by 5%. Instead of having it rise by 5%, let it rise by 1%. It’s still going up, but just not as much as previously budgeted. Since the Senate hasn’t passed a budget in three years, they probably don’t even know the numbers!

Cost of living increases could be trimmed to match the rate of inflation. The military budget could be trimmed by smoothing out a lot of supply chain issues.

That’s what real businesses do when they are in trouble. They make choices on how to allocate capital. Microeconomics is starting to catch up with our government. Hopefully, they will heed its warnings. There is a “fiscal cliff” coming January 2013, but it’s not nearly as bad as the one coming when entitlement spending overwhelms every line item in the budget. Then we will be Greece.

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