New York Times reporters Ben Casselman and Colby Smith wrote on A1 yesterday that “There is a basic rule of thumb when it comes to the federal budget. The government should spend heavily during times of crisis – recessions, wars, pandemics – and then get its fiscal house in order when the crisis passes.” Casselman and Smith will be excused for getting the “rule of thumb” exactly backwards. They got their information from economists who near monolithically believe to be true what isn't.
Governments don’t get their spending money from Pluto, rather they get it from you, me and the man behind the tree. And when politicians spend, they’re slowing economic growth. To believe otherwise is to believe that the centralized, politicized allocation of precious resources boosts the economy.
Economists also believe governments mobilize unspent funds with their taxing and spending. More realistically, no act of saving by private individuals ever subtracts from private “demand.” Instead, what we don’t spend is allocated through financial intermediaries to its highest use.
That’s why it’s most crucial for governments to reduce their spending footprint during economic downturns. Unspent wealth is more precious than ever as a path out of the downturn. Economists who grasp how the world works cheer for spending reductions when the economy is weak.
Government spending as the path to growth is embraced by Democrats rhetorically, while disdained rhetorically by Republicans as they spend with abandon similar to Democrats. That’s why the size and scope of government grows no matter the party in power. If and when the extraction of precious resources by governments through taxation and borrowing ever substantially shrinks thanks to a substantially reduced tax burden, left and right will finally see what real economic growth looks like. To say that it will make the prosperous present appear recessed by comparison brings new meaning to understatement.
Still, there’s a need to address the Republican desire to appear thrifty with taxpayer money while wasting it year after year. As the title of this write-up indicates, both sides are way off on deficits and debt. It’s the theme of my upcoming book, The Deficit Delusion.
For that, we turn to Senator Ron Johnson (R – WI). Talking to the Wall Street Journal on Monday, Johnson rather sanctimoniously asserted that “I’m saying things that people know need to be said.” You see, Johnson is a self-proclaimed deficit hawk who stands athwart the surely wasteful spending plan that Republicans are now trying to get through the Senate. Johnson goes on to say that “The kid who just exposed that the king is butt-naked may not be real [sic] popular, because he kind of made everybody else look like fools, but they all recognize he was right.” Not really. Those with a simple understanding of the why behind economy-sapping debt know why Johnson is just as wrong as the economists whispering in Casselman and Smith’s ears.
To see why, readers need only contemplate who – whether individuals, businesses or governments – gets to run up debt. The answer is simple, and it explains why spending cuts will never fix the debt. That’s because reductions in outlays just increase the ability of the borrower to borrow. The actual driver of debt is incomings: those known to have high incomings, and those expected to have exponentially more in the future, have those with cash in hand lined up to lend to them at some of the lowest rates of interest in the world.
What’s important is that extraction of wealth for government waste doesn’t boost a downtrodden economy contra Casselman and Smith. Contra Johnson, reduced waste or “budget balance” is similarly meaningless. Both sides are only different rhetorically, while predictably equal when it comes to spending and debt.
