Thursday, June 9, 2011
Why do Republicans think spending cuts grow the economy?
(Image courtesy of FRED)
Almost every modern economist agrees that cutting spending in a recession will only make things worse. Austrian economists are the only real exception to this rule, but they're wrong about pretty much everything and have never made an accurate prediction so they can be safely ignored. So why do Republicans insist that cutting government will increase jobs? How on earth could firing a bunch of people (which cuts in government inevitably result in) help increase jobs?
The answer comes down to a simple formula. The first thing anyone taking a macroeconomics course learns is that Gross Domestic Product equals Consumer Spending plus Investment plus Government Spending or:
GDP = C+I+G
It's a simple formula that proves true time and again. The problem is that Republicans seem to think the formula reads something like this:
GDP = C+I
Conservative economists aren't actually working from a different textbook, but Republican policy makers tend to ignore government spending as it pertains to GDP. Once you understand that conservatives mangle an important building block of economic science the fact that they can't seem to get anything right makes a lot of sense. They're just trying to free up all that GDP trapped in the government!