Will cutting federal spending really reduce jobs?

It looks like we have a deal on the debt ceiling. While avoiding the possibility of a government default is a good thing, the actual spending cuts are not actual “cuts,” but only relative to estimates of the growth of federal spending over the next decade.

Needless to say, I’m not sold on the proposal, but it is probably the best that could be achieved given the political limitations (I like this plan much better). However, it is depressing to see the same Keynsian claptrap being spewed by those who the media cites as mainstream economists.

According to the article:

“Unemployment will be higher than it would otherwise have been,” Mohamed El-Erian, the CEO of Pimco, the world’s largest bond investment firm, said yesterday on ABC News. “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.”

The article goes on to say:

And the consensus is that job losses are likely to outweigh the positive impact of increased business confidence. “When you look at the history of these things, the finding is that we shouldn’t be kidding ourselves,” Paolo Mauro of the International Monetary Fund and an expert on the impact of spending cuts, told the New York Times. “When you do fiscal adjustment in the near term, it does have an adverse impact on economic growth.”

Weren’t these the same people who sold us the “stimulus” as a sure-fire way to turn the US economy around?

Me, I think that cutting back federal spending and providing some indication that Washington is serious about cutting spending are the keys to spurring economic growth.

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One Reply to “Will cutting federal spending really reduce jobs?”

  1. Of course cutting spending is the key to economic growth. Outside of the Anglo-American echo chamber the idea that budget restraint is one of the essential preconditions for balanced long term growth is taken for granted. When we were kids studying introductory economics we were subjected to a course that was schizophrenic- half Keynes and half the neo-classical synthesis of Alfred Marshall. Sadly this has left our chattering classes permanently in thrall to what they think are the ideas of Keynes. Every single country that has conspicuously succeeded in lifting living standards has done so by rejecting the advice of American Keynesian economists. This began with the German economic miracle after 1949 and has continued with the countries of East Asia. The perfect contemporary example is Singapore- a country that is the closest thing to America’s opposite. We have a savings rate of 6% and total government spending approaching 50% of national income. Singapore has a savings rate of 40% and public spending of 10%. The result is we have an economic growth rate of 1% and an unemployment rate which if properly calculated is over 16%, while Singapore this year will grow by over 14% (10% last year), with an unemployment rate of 2.2%. What is striking about these numbers- and those of all successful countries is that they are a complete refutation of the Keynesian theory that investment is dependent on consumer demand, which is crippled by excess saving. What is crucial to the success of a market economy is the savings rate minus government borrowing, because this is the percentage of GDP that businesses can invest. If we have not noticed- and we have not thanks to the constant barrage of Keynes-speak in the media is that with a 6% savings rate and public borrowing of 10% we have a negative number, -4%, which not coincidently matches our trade deficit which is by definition the difference between borrowing and savings, leaving net investment at 0. This is terminal, for this means we are slowly selling off our countries assets as the per capita value of our country is slowly declining. Unfortunately the American economy cannot possibly move towards a healthy rate of growth without a steadily rising savings rate and government spending steadily declining- a decade or more austerity. Something a country can only do when it hits bottom- like Germany in 1949, or it is already at the bottom like Singapore at independence in 1963. Until then the Keynesian theory will remain our perennial rationalization for continuing down the road to insolvency and debt peonage.

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