More budget battles

Even unionized government employees are beginning to realize that their local leaders need to commit credibly to balancing their budgets in the short run. A growing number of people go as far as demanding long-term debt exit strategies for their cities and states. Alas, Barack Obama gives no indication that his administration has, or even intends to work out, such plans on a federal level. Those of us who insist on bold measures are accused of being irresponsibly attached to an ideology that makes sense on a personal level (or when the economy is growing strongly) but may be counterproductive in the extremely unusual circumstances of today. Just for that we are called "double dippers."

If you try to calculate the miniscule budget cuts proposed by the president as a percentage of the money that Washington intends to spend this year, you may notice that your pocket calculator has failed to capture them. Without fighting WWIII, the White House seems unconcerned by the fact that we are on a trajectory that will soon break FDR's record from the 1940s when our government's debt-to-GDP (i.e., national income) ratio briefly ran into the triple digits (measured in percentage points). We are told that a sharp decline in government spending will trigger a new recession. But is this a lesson learned from history and does the theory even make sense?

Remember the Keynesian warnings that decline in government spending at the end of WWII will plunge the American economy in a crisis that will make the Great Depression seem like "the good old times?" What really happened was that one of the sharpest federal budget cuts in history led to a boom in entrepreneurial activity and growth in living standards. The retreat of government from directing the economy freed up resources utilized much more efficiently in the private sector. It led to major structural changes in the U.S. industrial sector without causing unemployment problems. A closer look at the Rahn Curve gives empirical support to those members of Congress who view shrinking the size (and limiting the role) of our federal government as a chief means to restoring prosperity.

See Alex's previous column on "Budget battles" from Feb. 22.