Budget sequestration is as modest a step toward cutting Leviathan as one can imagine. Further progress will be difficult as long as people believe that slashing the size of government conflicts with reviving the economy. Nothing could be further from the truth.
In his recent debate on Charlie Rose, Nobel Prize-winning economist and New York Times columnist Paul Krugman said that even wasteful government spending should not be cut, because it would undermine job creation and economic recovery. This view isn’t quite as popular as it once was, but it is still influential.
The logic of the argument is that insufficient consumer spending caused the Great Recession, the anemic recovery, and persistent high unemployment. If people aren’t spending, so goes the argument, businesses lay off workers. And when the newly unemployed workers reduce their spending, more workers are laid off. This ripple effect puts the economy into recession. To end the recession, consumer demand must grow again, but it can’t grow because unemployment is high. It’s a vicious circle: people don’t spend enough because they don’t have jobs, but they can’t find jobs because people aren’t spending enough.
Therefore, says Krugman, government must spend. This is why he supports more debt. And this is why he thinks cutting spending to rein in the deficit is precisely the wrong thing to do now. Keep the deficit spending going to create jobs, Krugman says, and worry about the debt later. There’ll be plenty of time for that.
If this were really how things worked, we’d be in a fix. But they don’t work that way. Business cycles — the boom and bust — don’t happen because consumers all mysteriously decide to cut their spending, throwing people out of work. And since that’s not the cause of the downturn, increased government spending is not the cure.
In other words, the spending frenzy, the deficit, and the debt all can be addressed while the economy is recovering. In fact, radically downsizing government is the key to recovery.
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