TJP

According to Boehner and the Republicans, cutting government expenditures would create jobs. It is unfortunate that this Republican talking point goes unchallenged by the Democrats, the media and economists.

The Republican narrative that cutting government spending creates jobs is false. Such logic implies that gross domestic product (GDP) would increase when one of its additive components decreases, of course that is nonsensical math.

GDP or income is the addition of consumption, government, investment, and net exports. A decrease in government spending would cause GDP to fall, except if the other components increase by more than the decrease in government spending.

So, when Boehner and the Republicans claim that decreasing government spending would create jobs, they are implicitly saying that one or more of the other components of GDP would increase by more than the decrease in government spending.

Their narrative, however, fails to provide the mechanism that ties lower government spending to higher employment.

The facts and economic theory clearly contradicts Boehner and the Republican narrative. For instance, if Medicare or social security payments were decreased due to a cut in government spending, what would be the compensatory mechanism to increase GDP and employment?

Decreasing government spending reduces income and hence consumption, investment and employment.

Boehner and the Republicans know that many Americans do not understand the mechanism of job creation and can be easily deceived.

The graph below shows GDP and its components from 2000 to 2010. It shows that during the recession consumption and investment declined, and net exports became less negative, meaning that the difference between exports and imports narrowed. The only component that aided GDP was government spending.

Therefore, in the absence of government spending GDP would have remained low and the recovery would have been delayed.

Thus, rapidly reducing government spending at the onset of a recovery as suggested by Boehner and the Republicans could cause a double dip recession.

Certainly, there should be cause for inflationary and deficit concerns. However, a strong recovery would improve government revenues (more taxes will be collected) leading to a reduction in the deficit. It could, however, lead to high prices, but the Federal Reserve could quickly reduce excess reserves in the banking system.

It appears, therefore, that the Republicans merely want to prevent any economic improvement, since any economic improvement would be politically disadvantageous for them.

The problem with this strategy is that it hurts the very people that they profess to represent.

Post Comment