"If you just cut, if all you're thinking about doing is cutting spending, as you cut spending you'll slow down the economy, so you have to, at the same time, create pro-growth tax policies."A seemingly harmless statement, right? Nope, he got some immediate backlash from conservatives. One particular response I wanted to focus on was the one he got from the fiscally conservative Club for Growth. Andy Roth, their Vice President of governmental affairs, said the following:
"It's hogwash. . .The idea that balancing the budget would not help the economy is crazy. If we balanced the budget tomorrow on spending cuts alone, it would be fantastic for the economy."The long and short of it is this: all politics aside, from a purely economic standpoint, this statement is false. If those espousing this doctrine would only take a look back at the last time we had an economic downturn as severe as this, they'd know that fiscal and monetary contraction during a recovery is precisely the wrong thing to do.
A bit of history then, shall we? In 1936 and 1937, there was great pressure on FDR and the Fed (by the fiscally conservative) to start cutting the government spending incurred by the New Deal programs as well as to start raising interest rates. Since unemployment had started to come down some, (it was still quite high, around 10% based on the data) the recovery was thought to be well under way. The worry was also that there would be hyperinflation because of the low interest rates and a rise in commodity prices. The other fear was that all the debt we had run up would lead to the cost of borrowing to rise for the government. Sound familiar? Well, it should. Since taking control of the House in the 2010 midterms, Republicans have been touting an agenda of balancing the budget because we allegedly have a debt crisis on our hands in the United States. All of this is due to Obama's government spending extravaganza, which, heads up, is actually mostly just automatic stabilizers like unemployment insurance and safety net programs kicking in for unemployed and impoverished people. What's more, there's also enormous pressure on the Fed to start raising interest rates! Anybody remember Rick Perry threatening Ben Bernanke if he printed any more money? Well, all sorts of people are insisting that the Fed is going to cause huge inflation because gas prices and commodity prices were rising. Well, here's a hot little tip: the Fed doesn't control gas and commodity prices. There's such a thing as supply and demand. It tends to dictate prices of things.
Now that I've established the historical parallels, I suppose you want to know what happened in 1937, right? Well, FDR caved to pressure and started cutting spending, and the Fed started raising interest rates. So, was it great for the economy, like Andy Roth argued it would be? In short, no, it wasn't. In fact, it was quite the opposite of great. It was just awful. It led industrial production to plummet, unemployment to rise, and led to horrible deflation. It caused a double-dip recession.
These graphs illustrate what happened pretty well: (click to enlarge)
The dotted line is the unemployment rate adjusted to how it is measured nowadays.
Hardly great by anyone's measure. Unemployment rose about 5%, prices fell, and industrial production fell back to 1933 levels. Not only was this disastrous for the economy, it added years to the recovery, which, by looking at the unemployment rate and industrial production, still had a ways to go. These numbers are strikingly similar to where the U.S. stands today in its recovery.
Indeed, most of last year was spent discussing the debt ceiling debate, the budget, and how much to cut. With millions of people still unemployed, this hardly seems the time to focus on something that simply isn't an issue with the economy as depressed as it is. Just to be clear, I hold President Obama and Congressional Democrats responsible for this, too, not just Republicans. They could have chosen not to play along, but they did, and our economy languished for it.
So no, Andy Roth, it would not be great for the economy if we balanced the budget today on spending cuts alone. It would be disastrous. Any competent economist, conservative or liberal, would tell you that. The millions of Americans who are struggling right now deserve better than this. They deserve better than a group of charlatans and witch-doctors who are trying to pass off what is tantamount to blood-letting and ritual sacrifice as economic policy. We all deserve better.