Spending cuts spur economic growth
Despite the recent failure of the Buffett Rule in the Senate, a ruse wedge issue for Democrats, we’re still debating the merits of higher taxes. At the end of the year, the 2001 and 2003 taxes cuts are set to expire and there has been no movement from the White House or Congress to extend them — even the cuts for the middle class.
Of course, not extending the tax cuts could be harmful to the economy — what some are calling “Taxmageddon.” Some Democrats think we should go back to the incredibly high rates tax rates of decades ago, which is truly a terrible idea. Higher taxes, however, will not balance the budget, in fact, they will slow our economy down:
Democrats also continue to claim that cutting spending will set the economy back. This is a claim that President Barack Obama and his economic advisors have made many times. However, new research concludes that spending cuts lead to economic growth:
New research suggests that legislators should cut spending and enact growth-inducing policies. The reasoning? According to the study, spending cuts can positively affect economic growth and are the only historically reliable way to lower deficits and debt.
The authors of the study, Alberto Alesina and Francesco Giavazzi, write that “spending-based consolidations [spending cuts] accompanied by the right polices tend to be less recessionary or even have a positive impact on growth.” (emphasis added)
Alesina and Giavazzi also add that “only spending-based adjustments have eventually led to a permanent consolidation of the budget, as measured by the stabilization—if not the reduction—of debt-to-GDP ratios.”
No ordinary person needs a study to know that when government spends less of our money it will be better for the economy, and that less spending means less debt. Yet this proposition seems bewildering to many intellectuals who maintain that spending cuts would bring economic ruin. After all, they say, look at how pointlessly damaging European spending cuts have been.
Paul Krugman, for instance, concludes that the European example illuminates how “slashing spending in a depressed economy depresses the economy even more.”
But Europe has gone beyond cutting spending; it’s also hiked tax rates, which everyone agrees is contractionary. Alesina and Giavazzi’s study cautions that one must disentangle whether spending reductions, tax hikes, both, or neither cause hardship. Indeed, drawing conclusions like Krugman does—without discerning between spending cuts and tax hikes—is like observing an individual who consumes pizzas, sodas, burgers, and broccoli and concluding that broccoli is unhealthy and making him overweight. It’s careless analysis.
Don’t expect Obama and his advisors to back down from what they’ve been saying. It’s doesn’t fit their Keynesian economic models. The same models that predicted that the unemployment rate wouldn’t rise past 8% if the stimulus bill was passed in 2009. Maybe we should, just once, actually try pro-growth policies that will help get people back to work and get our economy moving again instead of these policies of economic destruction.