Cutting — and growing?

As both parties gird for a battle over spending cuts that could shut the
government down, it is interesting to ponder just what will happen to
the economy when, yes, some public-sector jobs are lost as a result of
the spending cuts now under consideration and, simultaneously, the rest
of the stimulus money runs out.
 
House Republicans, who passed a bill last week to cut $61 billion in
fiscal 2011, which ends in October, plan more cuts in their 2012 budget,
due out in April. They are pushing spending cuts as deficit reduction,
and the necessary response to our fiscal crisis brought on by both
parties under the Bush and Obama administrations. But the Republicans
are also selling cuts as pro-growth, in what they term their
“cut-and-grow” agenda. In recent weeks, as the debate over spending cuts
unfolded and took to the House floor for a long, substantive, open
(amen!) and heated debate, Republicans are mindful that Obama’s drumbeat
about “winning the future” and his veto threat could challenge their
“growth” message. To show their cut agenda would grow, they have begun
an effort, throughout all relevant committees in the House, to review
regulations and assess which ones may be hampering economic growth.
 
David Leonhardt, author of “Economic Scene,” wrote this week in The New York Times that cuts won’t bring prosperity. Leonhardt uses Germany as an example, to explain that growth that followed budget cuts in 2010 was short-lived. Cuts in the short term would only work if deficit reduction would lower interest rates, which would yield more investment and therefore hiring. This happened, Leonhardt explains, in the 1990s, when interest rates had been high. “But this virtuous cycle can’t happen today. Interest rates are already very low,” he writes.
 
So Leonhardt is making the case, the politically untenable case, for short-term stimulus. Though Germany cut spending, he says, the Germans didn’t cut as much as the British did and “partly as a result, Britain’s economy is now in worse shape than Germany’s.”
 
“For the sake of the economy the best compromise in coming weeks would be one that trades short-term spending for medium and long-term cuts,” he writes.  
 
The chances of that are slim. Stimulus is dead, even with some Democrats. Spending is politically toxic, just as entitlement reforms are. But after all the cutting, Republicans will still have to explain how cuts will grow the economy, especially if they don’t.
 

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