Budget Cuts Don’t Bring Prosperity
If the opponents of deep federal cuts, starting with President Obama, are trying to decide how hard to fight, they may want to err on the side of toughness. Both logic and history make this case.
The austerity crowd argues that government cuts will lead to more activity by the private sector. How could that be? The main way would be if the government were using so many resources that it was driving up their price and making it harder for companies to use them. In the early 1990s, for instance, government borrowing was pushing up interest rates. When the deficit began to fall, interest rates did too. Projects that had not previously been profitable for companies suddenly began to make sense. The resulting economic boom brought in more tax revenue and further reduced the deficit. But this virtuous cycle can’t happen today.
