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Romney: Spending Cuts Will Kill the Economy

If you’ve read one Paul Krugman column, you’ve read them all.  Alongside his unabating clarion call for ever more stimulus spending, Krugman decries spending cuts of all sizes, shapes and colors, and despises the idea of a balanced budget.  This clip just about sums up his entire body of work since 2007, and encapsulates the Obama administration’s approach to the economy for the duration of his term in office.

Leading the charge to slash spending, on the other hand, Paul Ryan has repeatedly made the case that we face a crushing burden of debt which must be addressed right away lest we hit the point of no return.

And where does Candidate Romney fit into the mix?  Speaking today in Shelby Township, Michigan, Gov. Romney situated himself in the Krugman school of economics.  “If you just cut, if all you’re thinking about doing is cutting spending, as you cut spending you’ll slow down the economy,” Gov. Romney stated.  “So you have to, at the same time, create pro-growth tax policies.”

Though Krugman and Romney agree that spending cuts would worsen the economy, there is, to be sure, a major distinction between the conclusions each man draws.  According to Krugman, spending cuts are bad; therefore, we must increase spending.  Romney has stated that spending cuts, if not coupled with pro-growth tax policies (which he plans to outline this week, incidentally), would be lethal.

But is the underlying assumption here that spending cuts on their own would slow down the economic recovery a correct one? If Krugman, Obama, and Romney are correct on this, then Paul Ryan and his emphasis on spending cuts have been folly. 

  1. Viator

    There are many problems with the conventional wisdom/ Romney/Obama/Krugman approach.  Consider:

    “Today (2/21/2012) , without much fanfare, US debt to GDP hit 101% with the latest issuance of $32 billion in 2 Year Bonds. If the moment when this ratio went from double to triple digits is still fresh in readers minds, is because it is: total debt hit and surpassed the most recently revised Q4 GDP on January 30,..three weeks ago. ..it has taken the US 21 days to add a full percentage point to this most critical of debt sustainability ratios: but fear not, with just under $1 trillion in new debt issuance on deck in the next 9 months, we will be at 110% in no time.”

    Rogoff:  debt-to-GDP ratios over 90% are associated with lower growth.

    Like Europe that 101% US debt/GDP ratio is a fiction. There is almost as much off the books US debt as official US debt, so the US debt/GDP ratio could be calculated around 200%.

    http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/01/US%20Debt%20Change_0.jpg

    Note the largest creditor of the US is the US (Federal Reserve)

  2. Palaeologus
    Diane Ellis, Ed.

    Palaeologus:But is the underlying assumption here that spending cuts on their own would slow down the economic recovery a correct one? If Krugman, Obama, and Romney are correct on this, then Paul Ryan and his emphasis on spending cuts have been folly.

    Or it means that spending cuts alone are insufficient. · 59 minutes ago

    If the Republican Congress had an opportunity in the future to secure significant spending cuts without tax reform, or nothing at all, which would be the more preferable option?

    Cuts.

    It’s hard to build a consensus for cuts, and they’re needed.

  3. liberal jim
    Joseph Eagar: Ok, a few points:

    1. Spending cutson their ownslow economic growth.  GDP is basically the sum of everything purchased, and if the government purchases less, GDP goes down.  This is obvious.

    2. Fiscal contractions can be offset with monetary loosening.  This requires a robustly growing economy, as in the 1990s.
    3. Paul Ryan does not propose massive spending cuts.  He proposes a gentle “soft landing” where deficits come down slowly.

    Deficit reduction is a tricky business.  Private investment has to increase at the same rate as deficits are reduced–or, to put it another way, deficit reduction can’t be faster than the rate of increase of private investment. · 7 hours ago

    Edited 7 hours ago

    To date Ryan has proposed no spending cuts, merely reductions in the rate of spending increases.

  4. K T Cat

    Sending money to the Department of the Interior (selected at random) so they can spend it only after a Byzantine contracting process helps the economy?

    Huh?

    Seriously, check out the contracting processes for any branch of the government and ask yourself if that’s the best way for the nation’s resources to be used.

    Romney is wrong.

  5. Tristan Abbey

    Well I won’t say Paul Ryan is a fool, but Kenneth Rogoff, one of the leading economists on debt crises, said in 2011:

    Q: Politicians use your work to argue for deep spending cuts now to trim our debt. Do you agree?

    A: If we tighten too fast, the economy will implode on itself. We didn’t get here in two years, and we shouldn’t try to get out of it in two years. But at the same time the idea that we can worry about the future later, that’s false. It’s not just about cutting spending. The tax take probably needs to go up. We need to clean up the tax system.

  6. Ross C

    Now I get it, that extra spending explains why Greece is in such sound financial shape.

  7. Leigh

    I saw this, and then I saw the Hot Air post about “labor unions playing an important role in our economy,” and I was going to scream.  But on closer examination, the labor union quote is fine.

    Whether he’s right or wrong, I don’t see how Romney is calling Ryan a fool.  Ryan is calling for pro-growth tax reform with his spending cuts, too — Romney is moving Ryan-ward.

    Also, although he calls for cuts in discretionary spending, Ryan’s focus on the debt is the need for entitlement reform — gradual cuts in the future, focusing on the trajectory.  The reforms have to be made now.

  8. liberal jim

    If you accept the premise of Krugman, Obama, Bush, Romney, etc then continuing to spend and not worry about deficits is the correct response.   Ryan has consistently opposed budgets that would have reduced spending and has proposed instead budgets that would have reduced the rate of increase in spending.  While talking about the danger of debt, he refuses to really address it.(This may be wise politically, but makes little fiscal sense.)

     Assuming the money supply remains constant no matter what policy is followed, the question becomes who can deploy capital more effectively and efficiently the government or private enterprise.  The premise that is not talked about is that the Fed will increase money supply in response to more deficit spending, but would not do the same in response to spending cuts.  Therefore spending produces the illusion of growth.  Unfortunately government spending does little to increase the velocity of money, which is the primary driver of growth. Spending cuts in theory would make more capital available to the private sector whose investments tend to increase the velocity of money more.

  9. Palaeologus

    But is the underlying assumption here that spending cuts on their own would slow down the economic recovery a correct one? If Krugman, Obama, and Romney are correct on this, then Paul Ryan and his emphasis on spending cuts have been folly.

    Or it means that spending cuts alone are insufficient.

  10. Percival

    So, which is worse? Rick Santorum, man of faith, discussing Satan’s game plan, or Mitt Romney, economic super-genius, going Keynesian?

    Every time I even begin to swing over to Mitt, he be-twerps himself again.

  11. Sandy
    Leigh:  

    Also, although he calls for cuts in discretionary spending, Ryan’s focus on the debt is the need for entitlement reform — gradual cuts in the future, focusing on the trajectory.  The reformshave to be made now. · 2 minutes ago

    I think that is exactly the point.  Spending, shmending.  If we don’t do entitlement reform there won’t be any money to spend on anything, and as Romney says, we have to  start growing.  Seems to me Romney is at least pointed in the right direction.

  12. DrewInWisconsin

    We are so screwed.

  13. Tom Meyer

    From what I understand of this, a truly sudden series of cuts would have a short-term negative effect on the economy, just as any major realignment would.  So technically, Romney may have a point, and it may be the smart thing to say in a general election.

    That said, this is just the latest in the series of ::facepalm:: like statements Romeny’s made in the last few months that make me worry. If he gets the nomination, we’re going to have to work in overdrive to keep him focused.  Which is unsettling…

  14. Whiskey Sam

    It’s a complex answer.  Yes, in the immediate term simply cutting spending will harm the economy in the sense that less money means government employees will be cut with all of the impacts that has on their personal spending, etc.  There are also assumptions involved regarding the marginal propensity to consume by the government spending the money relative to the person from whom it was originally taxed.  However, in the long term, it benefits the country in other economic measures like getting the deficit smaller relative to GDP which increases creditworthiness and lowers debt financing.  Krugman’s idea that cuts are bad therefore we should increase spending is a non sequitur.

    However, I also agree that tax revenues need to be increased to help close the deficit.  The way to do this is to eliminate loopholes in the tax code and to reform the tax code uniformly so that the tax base is broadened while at the same time lowering rates on business and investment gearing it more towards consumption.  Romney is correct that we need pro-growth tax reform coupled with cuts.  Simple cuts are not enough to help the economy without spurring private investment to replace it.

  15. katievs
    Percival: So, which is worse? Rick Santorum, man of faith, discussing Satan’s game plan, or Mitt Romney, economic super-genius, going Keynesian?

    Every time I even begin to swing over to Mitt, he be-twerps himself again. · 5 minutes ago

    Satorum did not discuss Satan’s game plan on the campaign trail.  All his 4 year old remarks tell us about his way of being in office is that he’s genuinely religious and  less likely to buckle under political pressure to do what he thinks isn’t right.

    Economically, he’s for cutting spending.

    So, put me down for thinking Romney’s keynesianism is worse.  Much.

  16. Fred Cole
    Percival: So, which is worse? Rick Santorum, man of faith, discussing Satan’s game plan, or Mitt Romney, economic super-genius, going Keynesian?

    Every time I even begin to swing over to Mitt, he be-twerps himself again. · 8 minutes ago

    So yeah, there’s this guy named Gary Johnson

  17. Bryan G. Stephens

    Romney is against cutting spending. That is the sound bite.

    Tell me again why he is so electable?

  18. Percival
    katievs

    Percival: So, which is worse? Rick Santorum, man of faith, discussing Satan’s game plan, or Mitt Romney, economic super-genius, going Keynesian?

    Every time I even begin to swing over to Mitt, he be-twerps himself again. · 5 minutes ago

    Satorum did not discuss Satan’s game plan on the campaign trail.  All his 4 year old remarks tell us about his way of being in office is that he’s genuinely religious and  less likely to buckle under political pressure to do what he thinks isn’t right.

    Economically, he’s for cutting spending.

    So, put me down for thinking Romney’s keynesianism is worse.  Much. · 1 minute ago

    I know, katie.  I’m just trying to get that other thread out of my noodle.

  19. MBF

    Harding cut spending by more than 50 percent. It seems to me the following decade turned out okay. Everyone at the trough will adjust eventually, then our economy can really, truly recover.

  20. James Of England

    You’re familiar with the Laffer Curve? Like tax cuts, which put money in people’s pockets, government spending puts money in people’s pockets. Each of these measures means that by borrowing a dollar, you can get more than a dollar’s worth of activity. People on the right talk about this as dynamic rather than static accounting for taxes, and  rarely talk about the same thing for spending, but essentially all economists recognize the general truth. The fights are about the size of the multipliers, where we are on the Laffer curve, etc, and questions of specific details where the multipliers have odd effects, not really about their existence.

    There is simply no way to cut the deficit without taking a hit to the economy. There is simply no way to continue to borrow like this without demolishing the economy.