Last month, Washington was abuzz with news of an “independent economic analysis” by economist Mark Zandi arguing spending cuts would result in 700,000 lost jobs this year and next. (Zandi is the same economist who estimated that the 2009 stimulus would keep average unemployment at 8.1 percent in 2009; instead it was 9.2 percent. He also estimated 8.9 unemployment in 2010; it was 9.6 percent.)
Pro-spending forces lauded the letter as if it were the last word from the economic community on the issue. Those forces failed to educate the public about studies in Canada, Ireland and Denmark after spending had been reduced, which showed spending cuts had no negative economic effect. Furthermore, a Goldman Sachs paper from 2010 that reviewed every major fiscal correction in the OECD countries since 1975 found budget cuts “typically boosted growth.”
Stanford University economist John Taylor, one of 150 economists who signed a February letter to President Barack Obama urging spending cuts, has explained how spending cuts help the economy.
Taylor recently wrote on his personal blog, “A credible plan to reduce gradually the deficit will increase economic growth and reduce unemployment by removing uncertainty and lowering the chances of large tax increases in the future.” Most Americans side with Taylor.
According to a March Bloomberg poll, 56 percent of adults said the most important issue facing the country was job creation. That beat out spending cuts, which received 42 percent. What is interesting is that the Bloomberg poll was one of the few nonpartisan, non-interest group polls to ask Americans about the connection between the two issues.
When asked which approach they thought was the best way to create jobs, 53 percent of Americans said cutting government spending and taxes. Only 44 percent said government “investment” (i.e. spending).
Americans know implicitly what economists will debate forever: Government overspending hurts, not helps, the economy. Why does Main Street acknowledge this while academics can’t agree?
Over the past decade (the 2009 stimulus was only the most recent example of government overreach), federal spending has increased from 18.2 percent of GDP in 2000 to 23.8 percent in 2010. Over the last four years (the last two years of the Bush administration and the first two of Obama’s), federal spending increased from just over $2.7 trillion in 2007 to nearly $3.5 trillion in 2010.
During that period — 2007-10 — our debt-to-GDP ratio skyrocketed from 64.4 percent to 93.2 percent.
Meanwhile, we’ve created not one net new job and our unemployment rate has jumped from 4 percent in January 2000 to 8.8 percent today. Our growth rate over the last decade (2000-09) averaged 1.8 percent — less than the 3.1 percent it averaged in the 1980s and the 3.2 percent in the 1990s. Why?
Government spending crowds out spending by the private sector. Each dollar spent by government — whether local, state or federal — is a dollar that has to be raised by taxing the private sector. As the economist Taylor explained, more government spending (especially at time of multi-trillion deficits) makes it more likely government will raise taxes. This threat has a chilling effect on the private sector that results in less investment by businesses and fewer jobs.
Spending cuts would send a signal to job creators that lawmakers believe Americans’ earnings should stay where they are most productive: in the private sector.
Gretchen Hamel is the executive director of Public Notice, a public policy think tank.
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