Can We Cut Our Way to Prosperity?

Monday, a report claiming the GOP budget would cost 700,000 jobs grabbed headlines. But will shrinking government really kill the recovery?

One economist from a moderately respected firm has made headlines with a report claiming that reduced government spending along the lines Republicans propose will cost about 700,000 U.S. jobs. In a narrow sense, of course, this is beyond dispute; in a broader sense, the reasoning behind the report is seriously faulty.

Let's start where it's right. If government spending declines, of course, the government will employ fewer people and pay less in wages. This will, of course, ripple through the economy and reduce non-government employment as well.  Insofar as government jobs do things that are economically productive on their own--maintain roads, running airports--there's at least some chance that cutting spending will harm the economy in the short run. (And all this puts aside the necessity of investing in things like defense and education that pay off only in the long run.)

But, right now, there's little evidence that the U.S. seriously underinvests in any of government's truly productive functions (and some evidence that necessary functions like defense are bloated).  There is significant evidence that a big government and giant debts are holding back the economy by misallocating funds that the private sector could make better use of than the government. Although some countries--China--have, indeed, spent their way to significant economic growth, the best economic turnarounds have happened in places like Canada and New Zealand that have stabilized spending and kept it at reasonably low levels.

So yes, reducing government spending in the wrong way--theoretically--could hurt the economy but, on balance, evidence shows that a nation can, indeed, cut its way to prosperity.

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