The (Lack of) Economics Behind Conservative Arguments about Spending

According to John Boehner, government spending is killing jobs and harming the economy. His idea is to cut domestic discretionary spending by 20 percent. Unfortunately, Boehner seems to have badly misplaced a lesson from an introductory economics course. Let's look at  the economics behind this popular conservative argument.

The economics behind the conservative complaint about spending are straightforward – in good economic times, government investment that leads to borrowing can "crowd out" private investment by raising interest rates, thereby diverting economic activity away from the private sector. This can be a legitimate concern in boom times, which is part of the reason having smaller deficits in good times is generally a good idea; a sizeable government deficit can lead to higher interest rates, which hurt the economy.

These, however, are nothing close to good economic times, and government is not driving out private sector investment and therefore not hurting job creation. How do we know this? There is virtually no inflation – economists are more worried about deflation right now – and a huge shortage of demand. Interest rates are basically the lowest they can possibly be, and the Federal Reserve keeps trying to drive them down. (That’s why the Federal Reserve has gone to quantitative easing; it can’t lower rates any further.)

The point of the stimulus, in fact, was that government needed to function as the spender of last resort to avoid a deflationary spiral.  In a package of tax cuts and spending, government injected demand into an economy that was sorely lacking it in order to spur the economy and create jobs. The idea behind stimulus is that government injects demand, which is then multiplied throughout the economy. Since the economy still sorely lacks demand, further cutting government would be an economic disaster of epic proportions. Here’s the kicker: the countercyclical economic underpinnings are the same on the spending and tax sides – so conservatives talking about the need to cut taxes in a recession are actually espousing the same Keynesian economics that I am. 

That the economics don’t work out for John Boehner right now points to another fact – that his arguments are actually about a philosophical belief in the appropriate size of government. Fair enough. But then let’s have that debate, over which government functions are appropriate and which ones are not. As John Boehner will soon find out (when he has a fight that sounds eerily similar to the one Bill Clinton cleaned Newt Gingrich’s clock on in 1995-1996), more than 80 percent of domestic discretionary programs are not ones Americans will actually consider "discretionary."


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