Larger Spending Cuts Would Help the Economy

March 7, 2013

Though all evidence shows that President Obama's first-term economic initiatives resulted in anemic growth, the president continues to push for more government stimulus spending, new social programs, higher taxes on upper-income earners, subsidies for some industries and increased regulation for all of them. Instead of continuing to expand the bloat of government debt, President Obama should consider more spending cuts, says Michael Boskin, a senior fellow at the Hoover Institution.

  • The $825 billion stimulus of 2009 cost hundreds of thousands of dollars per job but yielded no short-term economic growth.
  • Despite the stimulus' failures, Obama is pushing for universal preschool ($25 billion a year), Fix it First infrastructure repairs financed through an infrastructure bank ($50 billion) and Project Rebuild to refurbish private properties in cities ($15 billion).
  • He is also pushing for more green energy subsidies, an increase in the minimum wage and tax increases equal to half of the sequester's $85 billion in cuts.

Though the effects of Head Start early education are negligible at best and an increased minimum wage raises unemployment among low-skilled workers, Obama's proposed initiatives signal that the administration believes it knows what is best for the free market.

  • A growing debt-to-gross domestic product (GDP) ratio will eventually crowd out investment resulting in lower capital formation and lower real wages in the future.
  • A Stanford economics paper found that a reduction in federal spending over several years amounting to 3 percent of GDP will increase short-term GDP.
  • Expectations of lower future taxes and debt encourage higher spending as consumers expect higher incomes.
  • Since World War II, wealthy countries stabilized their budgets by averaging $5 to $6 of spending cuts per dollar of tax increases.

Keynesians and deficit-spending proponents argue that reducing government spending during a recession will hurt the economy. A balanced deficit reduction plan would mean $5 in cuts for every $1 dollar in tax hikes. Instead, the fiscal cliff deal traded $1 in spending cuts for every $40 in tax hikes.

President Obama and Senate Democrats are steadfast in their demands for $1 in tax hikes for every $1 in spending cuts. Empirical economic evidence shows that this policy is horribly unbalanced.

Source: Michael Boskin, "Larger Spending Cuts Would Help the Economy," Wall Street Journal, March 4, 2013.

 

Browse more articles on Tax and Spending Issues