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Republicans Are Dead Wrong: You Do NOT Cut Spending in a Down Economy

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As you’re probably aware, the news on the economic front isn’t the greatest right now. It’s not surprising, given the incredible shock to the system from the bursting of the “housing bubble” and the near-collapse of the financial sector in the last year of the Bush Administration. Since 2009, the situation’s been slowly improving, in large part because of actions taken by the government – the “stimulus” (inadequate and suboptimally structured as it was, thanks in large part to Republicans and conservadems) the rescue of the auto industry, the Federal Reserve’s infusions of cash into the system, etc. – but not nearly at the pace most of us would have hoped. Now, it appears that the economy’s slowing once again, with “falling home prices, declining auto sales, weaker consumer spending and a rising pace of layoffs,” among other problems.

Given this situation, what is the absolute last thing the government should do? You guessed it: exactly what Republicans and Tea Partiers want to do the most — cut, cut, and cut some more. Which, as anyone who’s ever taken a macroeconomics class knows, is the diametric opposite policy choice you would want to make at a time like this.

You know how Republicans, and many others (e.g., Terry McAuliffe often said in 2009 that “you don’t raise taxes in a down economy”) like to say you shouldn’t ever raise taxes in a struggling economy? Well, the flip side of that is just as clear: you equally, perhaps more so, do NOT want to cut spending in a down economy, either. From a macroeconomic perspective, what you want to do with government spending (“G” in the “C+I+G=GDP” equation we all learned in Macroeconomics 101) in the midst of a recession or weak economy is to increase it in order to “stimulate economic growth.” It’s called countercyclical, in that it works against the negative cycle in the economy. In contrast, cutting government spending in the midst of a weak economy would be “procyclical,” meaning a policy “that could magnify economic or financial fluctuations” (in this case, it would magnify the down economy).

The smart thing to do right now, given the weakness in the economy? Clearly, the answer “countercyclical” – increase government spending in the short run, keep interest rates low, etc. The stupid thing to do right now, given weakness in the economy?  Exactly what Republican’ts and Tea Partiers are proposing — slash government spending, adopt procyclical austerity measures, essentially guarantee a longer, worse, deeper economic recession and/or doldrums.

So, why would anyone in their right mind adopt Republican/Tea Party policy recommendations right now? The argument is that we need to tackle the long-term, structural deficit, which is driven by completely different factors – health care spending, mainly, plus the lowest government revenues as a share of the economy in 50+ years – that have nothing to do with short-term stimulatory measures.

Yet, to date, Republicans have not offered any serious plan – and no, Paul Ryan’s plan is not serious, as it locks in enormous deficits for decades to come, while taking a wrecking ball to Medicare as an added “benefit” – to deal with the long-term, structural deficit. Instead, what the Republicans and Tea Partiers have been screaming about (literally) is that we need to cut government spending, translated as “the miniscule part of the budget that is non-defense discretionary, right now.

If you wrote that answer in response to an essay question on a Macro 101 exam, you’d flunk. And rightly so. Yet, here in the real world, these wildly counterproductive, ignorant policies are taken seriously by the idiot media, by many politicians, and also be a significant share of the electorate. How do you govern a country like this? Let’s just put it this way, I don’t envy President Obama, Harry Reid, or anyone in Washington who has to deal with the proud-to-be-ignorant people who seriously seem to believe the utter nonsense they’re spewing out.

Oh, and that includes their rhetoric about how it really doesn’t matter if the United States of America defaults on its debts, which every serious economist – and Wall Street, and the Chamber of Commerce, and everyone else with any clue – knows would be a disaster. Yet this is treated as leverage in political negotiations?  Simply insane. I’ll tell you, it’s times like these that really make me wonder about the future of our country, one in which the BONErs and Can’tors and Norquists of the world are taken seriously, and one in which flunking Macroeconomics 101 is considered a mark of virtue.

  • Dan Sullivan

    on every point. And if they win out and collapse the economy, the debt will be the whipping boy.

    If we had continued the trend coming out of the Clinton years, not fought two unnecessay wars, and had applied the surplus to TARP and stimulus programs when the crisis arose, how would that be spun?

  • People always support “cutting spending” in the abstract. Sounds fiscal responsibility-ish. But this is the real world & “cutting spending” means laying off government workers, less aid for your state & local governments, and fewer government purchases from local businesses. Suddenly it doesn’t sound so easy.

  • KathyinBlacksburg

    The public is being had by these hucksters.  

  • Elaine in Roanoke

    It appears that the GOPers simply can’t read history. When we had the last economic crash (the Great Depression) caused by over-speculation and too much leveraging necessitating sharp debt reduction on the part of individuals, the election of 1936 brought in a so-called “Conservative Coalition” comprised of big-business-friendly Republicans and southern conservative Democrats. They advocated lower taxes on capital and wealth, fewer government regulation on business, suppression of labor union rights, less power residing in the federal government, etc. This bunch effectively slowed the progress of the New Dael and contributed to a “double dip” recession in 1936-1940. Sound familiar??

  • Hugo Estrada

    The reason why conservative won’t do any real battles against deficits is that deficits are great for them. That is why the last two most influential GOP presidents, Reagan and Bush, expanded or created the debt.

    The beauty is that deficits are nothing but win-win for conservatives. First you create a deficit through conservative policies such as massive tax cuts to the rich, subsidies to big corporations, and wars. Add to that their beloved deregulated markets. These create unstable economies through their natural boom and bust cycle, and then more money can be spent in saving Wall Street moguls.

    Then, the next step, once the deficit has been created as an excuse, is to cut social programs that conservative hate. At the same time, included with their social austerity plans, we get even more tax cuts and more military expenditures and subsidies to big corporations. So the more we attempt to fix the debt via program cuts, the bigger the actual debt will become.

    Some of your economy buffs will say that such a course will destroy the U.S. Yeah, you are right. But those who control the U.S. government will be fine. They have been fine through most of the crisis. They are earning more money. They will acquire more wealth through each crisis. And they have diversified their wealth; it is not all tied to the U.S.

    This is a sound conservative plan. It makes sense for federal elected officials to support it. Why would their poor conservative followers support it beats me.