Cutting Government Spending will hurt the Economy

The title says it all. Cutting spending, like everyone (especially conservatives) seems to want to do will hurt our very fragile economy. How do we know this? Well besides the entire tome of Keynesian economics telling us it is so, we have some good first-hand evidence from our latest economic numbers:

US growth is slowing down to a standstill

People having a hard time finding a job (unemployment is still over 9%) or looking at their stock portfolio know that the economy has been slowing down recently. As you can see from the chart, growth in the past 6 months has been much lower than it was last year. But why?

Experts note that  “business investment remained strong and in fact accelerated from the first quarter” of the year. If  the private sector is doing alright, why are we so close to falling back into recession?

 “The major drag came from government, on both the federal and state and local sides. Government subtracted 1.2 percentage points from growth in the first quarter, with the federal government accounting for about two-thirds of that,”

So the economy would have grown four times as fast as it did if the government sector wasn’t cutting back its spending. This is what cutting government spending during a fragile economic time does. It hurts the economy. In good economic times, it makes sense to cut back on government spending. But during bad times, (like right now) the private sector isn’t strong enough to compensate for a cutback in government spending. If you cut back on government spending while the private sector is weak, economic growth drops, unemployment goes up, stocks go down.

Unfortunately, our government system makes it so that the budget cutters (Republicans) have all the power, like we saw in the debt limit debate, while people who want to support the economy with additional stimulus (President Obama) have no way to accomplish what would be good for the country.

(Update 08/05): The monthly jobs report came out today, showing the same dynamics as the GDP report above. The private sector showed slow growth, adding a modest 154,000 jobs last month.  However, overall job growth was much slower because the government shed 37,000 jobs, for a net job growth of only 117,000 jobs in July. If state, local and the Federal governments were adding workers  instead of laying them off, we could be seeing some decent economic growth. But all these government spending cuts are clearly dragging our economy down.

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  1. Typical! Spend our way to success!! Why won’t my bank manager understand that?

    Spending = borrowing = debt = interest payments = more debt = no growth, just interest payments building up and up and up.

    When the market wises up to the scam that is the US economy, bond prices will tank, interest rates will soar, and then the US will find out what a scam (so called) Keynesian economics is!

    Get it – spending what you don’t have is NEVER good economics. Debt should be regarded as a LAST resort, but today is is the ONLY resort to keep the sham economy breathing. But it is a toxic ‘medicine’ that reaches a point where the medicine does more damage than good, and will ultimately kill what is left of the economy.

    • Well interest rates (despite Republicans’ best efforts) are still very near 0. The US can borrow almost for free right now, basically discounting your entire point. This may change in the future, of course, but for now we can spend money with almost no consequences (except the consequence that it will improve the present economy). Cutting spending now makes no sense in our immediate economic climate. I’ll do a post covering this soon.

        • Ben
        • October 26th, 2011

        In a free market, interest rates on loans are wildly skewed when backed by a freely spending government that devotes the Fed to securities rather than a balanced budget to it. Thus, “spending” is occurring with NEW money, in markets with over-inflated prices due to HIGH demand (provided artificially through currency-printing securities), and over-expenditure occurs in high risk areas; an economic bubble occurs. Soon, all of this government money will be flowing into unstable sectors that haven’t been properly and NATURALLY regulated by free market competition and true risk assessment; and, when productivity doesn’t make up the gap between inflation and perceived value of the dollar, the market will crash leaving us with even more debt.

        Cutting government SPENDING – just like we did in 1946 – gives money back to the people and allows THEM to spend in competitive markets; MORE spending occurs, and it doesn’t occur inefficiently through the government by means of tax-payer dollars or inflationary currency. Keynesian economics would say that there was “pent up demand” – which IS the case, but in the psychological sense and NOT in the sense that people were not spending money; instead, the demand was not being met because too much money was being taken out by the government and rerouted to inefficient markets, skewing the natural growth of the system. Markets need tax money to invest in assets and grow through savings in bank institutions. This is how productivity increases.

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