National Debt

Want To Boost Economic Growth? Tell Government To Spend Less

Research suggests reducing spending will boost consumption in the short- and long-run.

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Intellectuals are supposed to speak truth to power. Unfortunately, some seem to be more interested in saying what everyone expects them to say, which only reinforces the status quo. Thankfully, a few scholars are resisting this trend, fighting for what is true rather than what is popular.

Case in point: a recent Hoover Institution paper by economists John Cogan, Daniel Heil and John Taylor, which makes the case for a reduction in spending now in order to positively impact the economy.

It's refreshing to see their research, considering that we live in a world where pundits and even economists bend over backward to make the case that more debt is not a problem and that more fiscal stimulus is desirable. Never mind that the arguments that intellectuals offer to defend these claims aren't supported by the academic literature. Consider the mistaken notion that more spending will stimulate the economy and somehow reduce the debt burden of the policy in the first place. Research overwhelmingly confirms that, for a variety of reasons, the return of government spending on economic growth is much less than the money spent.

Then there's the argument that interest rates are low and hence, it's a good time to take on more debt—despite the chance that variable interest won't always be that low. But more debt, even at low rates, still means more interest payments. Before COVID-19, the United States paid close to $400 billion in interest payments annually, or 8 percent of our budget. It's only going to get worse now. Japan, for instance, has a massive amount of debt, despite its 0 percent long-term interest rates. Its debt repayments are its second-largest budget item.

I wish reporters and economists would stop asserting, like the Wall Street Journal recently did, "the example of Japan has shown that debts can rise for a long time, well above 200 percent of GDP, without sparking a fiscal crisis." Really? I would have thought that Japan's two decades of no growth and wage stagnation could be considered a crisis.

Moreover, Japan is quite different than the United States and can get away with more overall debt than we could. That's because most Japanese securities are held in the Social Security trust fund that's owned by the government. This means that net public sector debt is actually significantly lower in Japan than in the United States.

Enter the new paper by Cogan, Heil and Taylor, which finds that, when faced with an inevitable debt explosion in our future, the only viable and desirable option is for Uncle Sam to limit expenditures as a share of GDP, around the 20 percent ratio that prevailed before the pandemic. The authors find that this approach avoids the "potentially large increase in future federal taxes." Better yet, they actually find that the policy would boost both short- and long-term GDP.

This research will be added to decades of empirical evidence that spending-based consolidations are expansionary in the long term and, sometimes, can boost growth in the short term, too. However, my excitement with the paper is actually rooted in their scholarship and methodology, not just their conclusions.

Here's why: The traditional objection against spending cuts is that they hurt demand (consumption), but this study shows that a reduction in spending actually increases consumption in the short run and into the long run. That's because, in the same way people tend to increase their savings during a recession due to fear of the future, consumers also consider the long-term tax implications of today's spending measures. They'll increase their spending and investment habits in anticipation of future tax cuts—or, at the very least, no future tax hikes. The result is that the growth in output resulting from the spending restraint is driven primarily by consumption, which should be politically salient. The authors, however, also highlight that, as expected, investment reacts positively in the long run.

At a time when flawed arguments for more government spending and more debt are reemerging, this paper goes against the big government status quo and offers a blueprint for us to not only regain control of our spiraling debt but also do so in a way that will boost short- and long-term economic growth by boosting demand and then investment.

NEXT: In Convention Speech, Mike Pence Said Joe Biden Will Repeal Trump's Tariffs. If Only That Were True.

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  1. that makes sense. every dollar the government spend is taken from somebody who wanted to spend it on something else, so it’s automatically sub-optimal. then the government makes decisions politically instead of economically, so it’s less efficient on the spending side too.

    1. Uh taxes don’t come close to cover government spending. I guess you could say it’s taken from future generations but that seems a bit esoteric. It will all crash way before then.

      1. Except for inflation, which does decrease our purchasing power.

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        2. Inflation due to printing money is insidious because of the velocity of money – we get boiled slowly so we don’t notice

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    3. Don’t forget that the government doesn’t just take a dollar to spend a dollar. There are a lot of bureaucrats to support.

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  2. Lots of people said this for decades and it made little difference. There is no candidate that can get elected to congress and the presidency who will back it. We kinda sorta got close in the 90s. Now – forget about it.

  3. What about my free stuff?

    1. We were planning to send it out today, but somehow the warehouse got burned down in a mostly peaceful manner last night during the curfew.

  4. The model in the paper, although it is not described other than being referenced as NWAM 2, predicts money going to spending instead of investments. The big effect appears to be more about poor capital allocation because of interest rate manipulation and the expectation of higher taxes in the future. Record high stock prices in the face of a poor underlying economy is a sign of poor capital allocation.

    1. That should have been a reply to CE.

      1. The gods of social media know more about where your comment should go than you do.
        Kneel and raise your fist and be white!

    2. I think the idea of poor capital allocation is correct. For much of my adult life the idea is that the government pours money into the hands of the wealthiest and to have that money flow through the economy. I do not think that has really happened. Some has moved but much has been sequester by the wealthiest. The strongest capitalist economies have the biggest and strongest middle class. This is where government should target allocating support, either through tax cuts or through other means of support (access to loans, etc.).

      1. Yeah. Because the middle class has no access to loans.

        1. Cities use TFI to build shopping centers anticipating future taxes from the shopping center. Why not TFI’s to middle class assuming that an education will mean more income to tax, or a successful small business will mean more future returns in taxes. Instead of we like to focus on the big guys.

          1. Yeah. Because the middle class has no access to loans.

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  5. You know what would boost economic growth, liberty. Stopping government from initiating force.

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  8. I would have thought that Japan’s two decades of no growth and wage stagnation could be considered a crisis.

    No starvation + No blood in the streets = No crisis.

  9. there’s the argument that interest rates are low and hence, it’s a good time to take on more debt

    Obviously the solution is to implement negative interest rates and take on infinite debt.

  10. Spending less is a good, I will say a great idea in the abstract but is far more difficult to implement. Tax cuts are a good example because I believe that if you are not bringing in enough revenue tax cuts are spending. Likewise President Trump continues to spend money on a border wall, a vanity project, even after Congress refused to allocate that money. You can not cut spending until you are willing to have an open discussion on where the money is being spent. You can not cut spending until you are willing to compromise. Some of my priorities are met and so are some of yours.

    1. Tax cuts are not spending. Tax cuts are tax cuts.

      1. Tax cuts with borrowed money is “spending” plain and simple.

        1. No. They’re tax cuts. You don’t have to borrow money to cut taxes.

          1. But, hypothetically, if you a government does cut taxes, and accompanies that by borrowing money, would you agree that they are signing up for more spending when it comes time to repay the loans?

            This isn’t a question about what the government should be doing. And I think Moderation4ever and you don’t even have a disagreement about fiscal responsibility — he is implying that tax cuts and reduction in spending have to go together, just as you are.

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    2. Realistically, to have competent governance for our country, we have to have some compromise, or we have to split up the country. What we are doing now, two feuding factions that are trying to get everyone in the country to line up behind one team or another, is deeply dysfunctional.

  11. The economic fall out is already predicted by economic pundits, while I am enjoying Fortnite Game on my mobile in chilled room under hot weather

  12. I’d like clarification regarding the observation that “most Japanese securities are held in the Social Security trust fund that’s owned by the government.” Are these securities the same as the IOUs held in the SS trust fund in the U.S.? If so, when they are redeemed, doesn’t the Japan Treasury need to borrow money from the public to acquire the necessary funds, leaving total debt unchanged? If so, why is the debt held in the SS trust fund any less significant than other government debt?

  13. Eat it, John Maynard Keynes.

    1. I think one place where Keynes and other macroeconomists go wrong is that they will take a simplistic equation that may be useful for gross *measurement* of an economy, and try to use the math to *control* the economy. You end up with the dumb idea that there is a simple “multiplier” you can apply to government spending, or that you can make the economy do what you want by adjusting a few input knobs.

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  15. If we look at money as the tool that it is, a placeholder for a unit of wealth between people doing business that allows us to travel with the wealth (instead in a barter system, say, where you must walk around with the goat you just traded for that keg of milled flour).

    The problem with money and debt (at interest) becomes clear to us when we look at it as the tool that it is.

    Instead, we have a system of legalized money cartels, banks and private Central Banks, who control both the amount of money in our system, and also the rates of interest which it is traded.

    Imagine this system for a moment:

    The Central Bank (The Federal Reserve in the U.S. Case) creates, completely out of thin air and nothing more, $100,000,000,000, and lends that money to their buddies at the large major banks (via the Fed’s discount window) at or near 0% interest. These banks then take that $100,000,000,000, multiply it by a factor of 9 (the fractional reserve lending rule), and lend that money out to you, me, and everyone we know at interest rates ranging from 2.5% (30-year fixed loans), to 25% (credit cards).

    Money is no longer a tool to facilitate commerce, but is now (and has been since 1913 in the U.S., and off and on for 150+ years before that) been allowed to be controlled by a handful of very powerful families.

    Once upon a time, before around 1900, presidential candidates would regularly and often make monetary policy a major plank in their agenda. People understood that Big Banks illegally controlled our money, and therefore controlled us. Today, we no longer talk about such things, and when we do, are often labeled a “conspiracy theorist”.

    The depth of our brainwashing regarding our monetary policy is astounding, and is the single and only reason for our collective indentured servitude, which yokes us in debt, and therefore keeps each and every one of us enslaved.

    We accept this system because that is all we have ever known, and have known, since the creation of our current Central Bank via the 1913 Federal Reserve Act.

    But, we are told that economic disparity is because we are all a bunch of racists, or because we like to steal from our neighbors, or because we are bad at the core, and are then sold the moronic storyline that says “Hey, if we simply stop racism, then the brown/black citizens of our country will be set free economically free!”.

    This requires us to ignore the tens of millions of poor, working white families. If this is all about racism…then why are there poor working white families who are indentured so heavily in debt, and paying horribly high interest rates?

    Ignore the Left’s rhetoric, for it is immature, and so heavily misinformed.

    And, in the meantime, avoid debt like the plague that it is. That is the only way out of the choke hold the banking cartels want us all to be in.

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