U.S. Can't Cut Its Way to Growth

In a recent blogpost debunking claims that reducing government spending always leads to a quick economic recovery, FrumForum's Noah Kristula-Green offered a (short) list of countries that cut spending, reduced deficits, and then realized healthy economic growth.  His list offers several important revelations.

First—as he points out—reducing spending isn’t a surefire way to cause sustained growth. Second, as Kristula-Green also observes, the countries that saw growth following spending cuts were quite different from the United States: not only had all of them had straightforwardly socialist governance but all of them are reasonably small. The largest of them, Netherlands, has an overall economy about the size of Florida’s. But there’s more too: the spending-cutting reformers were people strongly committed to preserving (and even improving) the provision of core government functions.

New Zealand’s 1993-1994 reforms, led by then-finance minister Ruth Richardson of the right-leaning National Party, took place in a context of trying to save portions of the country’s welfare state following a nominally left-wing government’s rather radical reforms of it.  (The same conservative government also engineered a huge bank bailout immediately after taking office.) While spending did fall, “real investment” (admittedly, under calculations that the government itself designed) in public services actually increased as duplicative programs were merged and the government figured out new ways of providing services. Maurice McTigue, now of the Mercatus Center, for example, contracted out every single function of what had been a huge state-owned construction company then called The Ministry of Works (he even contracted with law firms to negotiate the contracts) but, at the same time, actually increased the number and quality of roads and bridges built.

And some situations may be sui generis. Although their actual impacts can be debated (there’s some evidence that such payments are inefficient), the spending cuts that helped bring about Ireland’s “Celtic Tiger” economy were made possible in part because European Union transfer payments had reduced the need for infrastructure investment. That economic boom collapsed, spectacularly in the late 2000s, as a combination of huge deficits, tax cuts coupled with spending increases, and a housing bubble sent the economy for a tailspin. Sound familiar?

The bottom line: cutting one's way to prosperity probably is possible if difficult. But the countries that have done it best seem to have paid a lot of attention to governing.

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