Cut And Grow Fail: CBO Schools Tea Party Freshman In Basic Economics
Brian Beutler | August 11, 2011, 3:15PM
Rep. Tim Huelskamp (R-KS), a Tea Party-backed freshman who voted against the final debt limit bill, recently asked to hear from the Congressional Budget Office about the impact of government spending on economic growth. It's an article of faith on the right that vastly shrinking government will unleash the forces of private enterprise, and faced with CBO's opposing view, Huelskamp wanted to know the answer to two questions:
1). What current federal departments, agencies, programs, or portions thereof do not contribute to economic growth?
2). In the programs that CBO believes do contribute to economic growth, what level of spending cuts would amount to a level you believe would be significant enough to "probably slow the economic recovery"?
But if the newly elected member of the Budget Committee was hoping the non-partisan CBO would buy into his premise, he'll be sorely disappointed.
In a response letter Thursday, CBO-chief Doug Elmendorf gives Huelskamp a layman's lesson in Keynesian economics: Under current economic circumstances, new federal spending would help economic growth, and current and future cuts could stymie it, particularly if they hit key government investment.
"When demand for goods and services falls short of the economy's ability to produce them, as is the case currently, increasing government spending can increase aggregate demand and thereby narrow the gap between the economy's actual and potential levels of output," Elmendorf writes.
The precise details matter. The more robust the economy, the lower the impact. But, according to Elmendorf, "when the Federal Reserve's ability to lower short-run interest rates is constrained because those rates are already near zero, as they are currently, the short-run effects of changes in government spending on output tend to be larger than usual."
To illustrate the point, Elmendorf notes that deficit reduction measures that cut spending by $100 billion next fiscal year, and hundreds of billions more over the coming decade "would decrease real (inflation-adjusted) gross national product (GNP) in 2012, 2013, and 2014 by amounts ranging from roughly 0.1 percent to 0.6 percent depending on the year and the assumptions used." In other words, the GOP's current governing theory is damaging the economy and, by implication, costing jobs. And for those Republicans who want to cut more, " a reduction in primary deficits that followed the same gradual time path but was twice as large would produce macroeconomic effects that were roughly twice as large."