Spending vs. Cutting to Encourage Recovery

There are some things that fit well with the phrase common sense, and some that don’t. Not everything that seems complex or uncertain is outside the bounds of reality, but some things, ultimately, just don’t make sense. There is a strong political bias that “cutting spending” is a conservative principle, because it is prudent to spend less, but whether the policy is in fact conservative, or whether it works: that is another story.

There is a powerful rhetorical draw in the idea: just spend less, and everything about “the economy” —whatever that means— will improve. This is like saying, if you provide less opportunity for investment, there will be more opportunity for investment; or, if you reduce the wealth available, the wealth available will increase; or, you need to burn the village in order to save it.

It is not conservative or liberal to spend or to cut spending; it’s not even really fully Keynesian to spend or Smithian to wager on unfettered free markets. There is exaggeration in all of that, and the exaggeration matters. Conservative and liberal may not even really be polar opposites, as we’re led to believe.

Everybody wants to be responsible, and everybody wants to do the smarter thing: what’s different is where individual approaches place their conservative or their liberal attention. What does cutting mean, exactly? It means less funding for whatever is “de-funded”, and with each service, project or capacity, that sees its funding reduced, there is a direct impact on life in the affected communities.

If, for instance, earmarks for special projects are eliminated, specific Congressional districts that currently benefit from major Defense contracts might see those contracts collapse or be eliminated. If funding for “public services” is eliminated, police, fire and ambulance services may be scaled back or eliminated. There will be fewer teachers, larger class sizes, fewer books and fewer computers available to our children.

If funding for “farm subsidies” is eliminated, there would likely be a rash of overplanting, a wave of “toxic competition” in grain, dairy and meat markets, and we could see the beginning a 1930s-style “dust bowl”, as land is overtaxed and harvest output potential is depleted. In much of the world, this is exactly what is happening already.

If funding for alternative energy sources is eliminated, there would be less competition for carbon fuel giants like Exxon Mobil, who would be freer to profit from manipulating prices in a market where there is not enough fuel for the ever-expanding global demand. The price of everything would increase, and economic growth would be under severe pressure to slow down as people withhold routine spending.

In short, the direct line between government spending and economic collapse is not very certain, and the connection between “deep cuts” in government spending and economic recovery is not clearly there. In fact, when David Cameron, the coalition prime minister of the United Kingdom, imposed that kind of regime last year, it led to a steep and almost instant decline in GDP—numbers that if they are sustained, would constitute an economic depression. Political philosophy can be broken down into three basic families:

  1. the kind that is performative, i.e. relates to policies that can work and will build a better future;
  2. the kind that is image-conscious, i.e. seeks to make a positive impression, regardless of the facts;
  3. the kind that is corrosive, i.e. confuses the other two for rhetorical advantage and gets it all wrong…

There is always a risk of political philosophy degenerating into type 3, the corrosive combination of an image-conscious rhetoric that wants to be performative, but is incapable of producing the right results. To avoid that risk, we ask of our public servants that they put the ideal of service ahead of the aim of “winning” political skirmishes and that they refuse to play fast and loose with the facts.

Our hope is that if we have good people committed to service, people who are honest and want to get it right, they will not let us down by putting forward a political philosophy that is strewn with corrosive distortions and incapable of achieving positive outcomes. We entrust our civilization to public servants with this hope in mind, but we must also take it upon ourselves to think seriously about what we are hearing, to think critically and be honest about what the facts of a policy mean, in the environment in which they happen.

On economic recovery: there is no moment in the history of the United States that we can point to where “across-the-board cuts” in government spending produced an immediate and measurable surge of economic activity in the private sector. There are, however, many instances where spending has been used to achieve a resurgence of private-sector economic activity, and we know it works. That is called “stimulus”.

Cuts are not stimulative; by definition, they cannot be. Even tax cuts are not very stimulative, certainly not compared to spending or even to “giveaway” spending, like food stamps. Food stamps happen to have the highest stimulative impact of any public sector activity, over the short term, including tax cuts of every kind. This is because they return money to communities where it is most needed and where it will immediately flow back into the economy.

Education spending has the highest long-term return on investment, increasing revenues to local and state governments by as much as $4 for every $1 spent, within a 20-year period. But reasonable people disagree that stimulus is the best way to encourage sustained recovery, or which kind is preferable.

The American Recovery and Reinvestment Act of 2009, labeled by opponents as “the Obama stimulus”, was in fact not a massive instantaneous stimulus or “spending binge”, but a diverse array of reforms, some of which included specific stimulus spending, over several years, but most of which amounted to tax cuts for middle class families and small businesses and/or incentives to innovate or to invest or create jobs.

It was modeled on a wide array of policy successes, mostly over the last century, where incentives to innovate, to hire, to launch new ventures, to study, or to reinvest in communities, turned out to have a sustained positive impact on communities, which saw their resilience and their wealth of opportunity grow dramatically.

The principled independent position on such a program is to view it as “smart stimulus” intended to foster sustainable long-term economic recovery: in part because that’s what it was meant to be, and also because it has behaved much in that way. There is no reason why someone without party affiliation or a specific financial interest of a specific—and likely very narrow—kind, would need to have that law distorted into a “socialist takeover” or binge of “wasteful spending”, as it was neither.

Another way to make this point is to say, simply, that fixing the chaotic aftermath of a hugely wasteful binge—in which major banks sought to profit from misguided and unsustainable economic distortions—can look expensive at first, but if achieved, will pay dividends over time. From what we know about capitalist economics and the healthy functioning of democratic societies where the middle-class is strong, deep cuts in government spending don’t make a lot of sense, in the short term.

What makes sense is slowing the expansion of spending and reducing the percentage of spending that goes to “interest payments”, i.e. paying back bonds, where those bonds are not a hidden kind of investment. Governments have a unique ability to “spend” even as they invest in future revenue streams.

If “interest payments” on bonds owned by our leading trade partners result in better investment flows for any part of our economic engine (supply chain efficiency, reduced costs at home, etc.), they can ultimately turn into a kind of pay-out that pays us back over time. Beyond that, we have to consider that most US government bonds are not due to be paid for a long time, and it is a politically-driven myth that the “lenders” who have purchased those bonds will “call in our debt”.

The use of bonds is intelligent borrowing, because it is cheap (pays low interest) and because bondholders have a vested interest in ensuring the fiscal stability (or even expansion) of the entity they have invested in. That kind of debt is absolutely not comparable to situations where poor nations have gotten in over their heads borrowing huge sums directly from the World Bank or the International Monetary Fund. In those cases, international loans really are loans, and they come with conditions that sometimes allow for the lender to alter conditions of repayment, and that puts governments that borrow in such a way in a vulnerable position, fiscally and economically.

The United States is not giving up its right to control its own spending priorities or its future freedom to shape its own destiny, by selling bonds, which critics refer to as “borrowing”. Social Security is not insolvent, and it is not a deficit issue, because Social Security funds are drawn from a specific funding pool that goes to no other government program. At present there is a massive surplus and the program will not be at risk of falling below 100% of its obligations until 26 years from now.

The growth in Medicare and Medicaid spending, and in the budget for the Department of Defense, are the key areas where budget demands are expanding at an unhealthy rate. The Affordable Care Act does some things to help slow the growth of Medicare and Medicaid spending, but that problem will only be fixed when the private sector (insurers, pharmaceutical manufacturers AND healthcare providers) finds a way to stop the rapid growth in pricing.

“Cutting fraud, waste and abuse” is the new catch phrase on both sides of the political divide, for addressing ways to reduce the burden of funding Medicare and Defense, and there’s good reason. Medicare fraud, waste and abuse, is estimated to exceed $50 billion per year, and the numbers for Defense—still not sufficiently studied for a number of reasons—may run even higher.

Today, the budget released for the Department of Defense is the largest ever, and when adjusted for inflation, the most significant since World War II. There are clearly many costly contracts that deliver huge sums of money to long-standing Defense contractors, but the return on investment to taxpayers is, in many cases, questionable. For independent voters with a view to shape a principled public policy, it matters far more whether our fighting men and women go into battle equipped to operate in a safe and surgical manner and that they are well treated when they return.

We don’t need the world’s most expensive Defense research programs, if that means a military not equipped to care for its human constituents or a Defense Dept. that is focused on steering huge sums of taxpayer dollars to for-profit entities, without considering the ultimate cost or benefit to taxpayers.

In short, not being bound by either the ideological prejudice that funding helps society work better or that cutting spending will somehow correct complex deficiencies, principled independents can say clearly: the goal must be to achieve a government that does the most good while wasting nothing. It might even be worth mentioning that ideology does not stimulate economic recovery or foster long-term innovation and resilience.

Spending as such doesn’t fix anything, and neither does cutting. Not all spending or cutting is the same. It matters what you buy when you spend, and what you lose when you don’t. The way we can build a better, more democratic and vibrant American future, is by spending wisely, aware of what we are doing, and committed to making it work.

I feel it’s safe to say I speak for independents everywhere when I urge Congress not to use budget deficits as a pretext to undermine useful government programs that help build stable communities where real people have more opportunity for education and advancement. Let’s make sure our republic lives up to the grandeur and nobility of character we imagine it must relay to the world, and build a future where thriving, and not collapse, is the new normal.

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Originally published February 15, 2011, at IndependentsOfPrinciple.com

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