Saturday, February 26, 2011 - Goldman Sachsonomics

I’ve been hearing this argument – that reducing federal spending will reduce jobs.  This article shows a simple refutation of that line of thought. - Opinion: Goldman Sachsonomics


Washington's spending fight heats up next week as Democrats try to derail House Republican attempts to shave $61 billion from the federal budget. Believe it or not, their favorite argument seems to be that cutting government spending reduces economic growth. Seriously.

Chris Van Hollen, the budget leader for House Democrats, declared on CBS's "Face the Nation" last Sunday that the GOP budget cuts—a 2% reduction out of $3.6 trillion in fiscal 2011 spending—would cost 800,000 jobs.  This is nothing more than the old Keynesian "multiplier" back for another political run.

As our readers k now, this notion assumes that government spending is free to the economy, and that all government expenditures have only stimulative benefits. It also assumes that there are no economic costs to deficit spending, although such spending must be financed by borrowing or higher taxes. Thus if the federal budget were to increase by, say, $1 trillion, then we could magically lower the unemployment rate to 5% or 6%. It's plug and play economics: Plug in spending and multiplier numbers and, presto, you get the job creation or destruction numbers you need for a political talking point.

House Republicans are finally acknowledging that there is no Keynesian tooth fairy, that our $3.6 trillion government with its $1.6 trillion deficit has got to get smaller and start paying its bills, and the time to start doing so is now.




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