“[I]t would be very helpful, even to the current recovery, to market confidence, if there were a sustainable credible plan for a fiscal exit.”
—Ben Bernanke, Chairman of the Federal Reserve, February 24, 2010
Where we are
Democrat policies have resulted in the worst unemployment in more than a generation—at or above 8 percent for 25 consecutive months, the longest such streak since the Great Depression. In the Pelosi-Reid Congress, Democrats ballooned the gross national debt from $8.67 trillion to $14.1 trillion, an increase of $5.43 trillion or 63 percent. From the presidencies of George Washington to Bill Clinton, the federal government amassed as much debt as Democrats added in just four years in power (2007-2011).
Where are we headed
The Heritage Foundation’s 2011 Index of Economic Freedom noted that government spending correlates to economic growth. The data indicates that countries with better scores in the “Government Spending” category also have faster-growing economies. Sadly, the U.S. scored a 56 in this category, eight points below the world average.
The president’s FY2012 budget included combined deficits between 2012 and 2021 totaling $7.2 trillion. In order to completely eliminate our projected budget deficits through tax increases, everyone in the country—including small business owners that file at individual rates—would have to pay an additional $23,180. Even Treasury Secretary Geithner admitted in recent Senate Budget Committee testimony that this is an “unsustainable” path for our nation’s finances.
The threat of inaction
As Drs. Carmen Reinhart and Kenneth Rogoff point out in their latest book, Growth in a Time of Debt, when a nation’s gross debt reaches 90 percent of GDP, the median loss of economic growth is 1 percent.
With most economists predicting growth for the U.S. in the range of 3 percent, the threat of continuing on the deficit- and debt-fueled path of President Obama and the Democrats would mean reducing our growth potential by one third. Countless jobs that would otherwise be created in an economic recovery will be choked by the leviathan government overspending.
The Depression of 1946?: In a 2010 article for the Cato Policy Report (Vol. XXXII, No. 3), economists Jason E. Taylor and Richard K. Vedder outlined the lessons of the largest public sector drawdown in the country’s history. The cuts to government spending following WWII were quick and deep due to the rather unexpected ending to the war. Taylor and Vedder point out that federal spending fell from $84 billion in 1945 to $30 billion in 1946—a reduction of more than 60 percent! Yet despite the abundant warnings of economists that this withdrawal of Keynesian stimulus was sure to lead to a second Great Depression, civilian employment grew by over 4 million between 1945 and 1947, with unemployment remaining under 4.5 percent in the first three postwar years (below the long-run average rate during the 20th century). The article notes:
"Household consumption, business investment, and net exports all boomed as government spending receded. The postwar era provides a classic illustration of how government spending 'crowds out' private sector spending and how the economy can thrive when government’s shadow is dramatically reduced…the lesson from 1945-47 is that a sharp reduction in government spending frees up assets for productive use and leads to renewed growth."
Doing what works
A 2010 study by the International Monetary Fund (IMF) examined previous attempts of various countries at rectifying fiscal imbalances. The study, “Strategies for Fiscal Consolidation in the Post-Crisis World,” included a key finding that “fiscal contraction has been more likely to raise output when cuts focus on government wages or transfers.”
Indeed, the experiences of advanced economies indicated that “debt reduction would help keep interest rates in check, [and] foster medium- and long-term economic growth.”
We can say one thing with confidence: historic deficits and debt lead to historic decreases in economic growth. Even the National Association for Business Economics (NABE), a professional association for business economists and those who use economics in the workplace, recently published its 2011-2012 outlook from a survey of 47 professional forecasters noting concern about “high levels of government deficits and debt.”
House Republicans continue to echo the message of Speaker Boehner’s February letter to President Obama, with 150 economists calling on the Administration and Democrats in Congress to reduce government spending immediately in order to create a more favorable environment for private-sector job creation—smaller government leads to job growth.
House Republicans’ have passed numerous bills in the first 100 days of the 112th Congress to cut spending, reduce deficits, and prevent higher taxes and overburdening regulations—such is the only way to enable strong, job-producing growth in the economy.