Ignorance Index II The Spending Cuts Myth

Robert Borosage

Conservative Republicans hold as an article of faith that cutting government spending creates jobs, even in the midst of a recession. House Majority Leader Eric Cantor, the conservative zealot who has personally blown up the debt ceiling talks twice over the mere hint of closing tax loopholes, says, “All of our efforts are centered around jobs – starting with cutting spending and federal regulations – to grow the economy so that people can get back to work.”

Ignorance IndexPart II in a series of posts that refute some of the Orwellian, “ignorance is strength” falsehoods used by conservative leaders to control the economic debate.
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But this is nonsense. There’s no economic theory that would suggest that in current conditions, cutting government spending would create jobs.

Despite the conservative mantra that “government doesn’t create jobs, the private sector creates jobs,” even Cantor and Republican conservatives admit, news flash, that cutting government spending will cut government jobs.

As Speaker John Boehner put it, if cuts cost government jobs, “so be it.” But as government employment has been going down over the last months, we’ve seen no burst of private sector jobs creation. Last month’s horrific jobs report illustrated this: Cuts in government spending at the state, local and national level led to the loss of 39,000 jobs in the public sector, while the private sector generated only 57,000. The result, given the increasing numbers coming into the workforce, kicked up the unemployment rate to 9.2% – or over 14 million people. Great Britain which has embarked on deep spending cuts with the election of a conservative government has witnessed rising unemployment, nine months without any growth whatsoever, and appears headed back into recession.

The following chart is complicated but shows that while different economic conditions produce widely different outcomes, in the states, larger government spending cuts have tended to produce higher unemployment.

In a growing economy, conservatives argue that deficit spending by the government crowds out private investment by raising interest rates. Since they heroically assume that the private sector invests more efficiently than the public sector, they argue this costs jobs. (How that assumption can be made after the private sector has just burned several trillion gambling on the housing bubble and peddling junk is testament to faith over evidence.) Yet conservative economists admit that those assumptions don’t apply in current conditions. With mass unemployment, companies are sitting on over a trillion dollars in cash looking for customers, and interest rates are near record lows.

So conservatives (and sadly, the president on his bad days) now invoke what Paul Krugman calls the “confidence fairy.” Turns out our businesses are struck with a crisis of confidence, about debts, potential tax hikes, perilous futures. So conservatives argue if we make wrenching cuts in spending, laying off government workers, forcing seniors to pay more for health care and students to pay more in tuition, and promise never, never, never to raise taxes, businesses will gain the confidence to invest, despite the resulting government layoffs. But businesses lack customers, not confidence. They lack demand for the products they are selling. They are happy to invest in countries like China and Brazil where markets are growing, despite Communist government piracy and regulation in China or currency and inflation instability in Brazil.

Deep spending cuts will lay off government workers and contract employees, reduce demand and customers. It takes a blind belief in market fundamentalism – divorced from any known economic model – to believe that deep cuts in government spending now will magically generate private sector job growth.

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