Mythbusters: Why Cutting Government Spending Won't Revive the Economy

Last Updated Jul 6, 2011 9:01 AM EDT

Government spending is busting the budget, spiraling out of control, sentencing our children to penury. Hey, feel free to substitute your own metaphor -- they're all wrong, anyway.

Since 2001, a year the feds recorded a surplus of $128 billion, domestic spending on education, health care, nutrition, environmental protection and other non-national security programs has soared by exactly $0, according to new figures (adjusted for inflation and population growth) supplied by the Senate Appropriations Committee.

So what is straining the budget? Defense, for one. As the helpful chart below from Talking Points Memo makes clear, spending on the wars in Afghanistan and Iraq, as well as on regular Pentagon business, has jumped 174 percent over the last decade. Medicare and Medicaid have gotten more expensive, too. And the piece of the puzzle that congressional Republicans are least likely to admit as driving the deficit -- falling tax revenue, which is at its lowest level in the U.S. since the 1960s. TPM's Brian Beutler explains:

In the wake of the Bush tax cuts, and the Great Recession, tax revenue has fallen through the floor to near-historic lows. As a percentage of GDP, it's fallen 24 percent since 2001, and if you correct for inflation, the government is collecting nearly 20 percent less per person than it was a decade ago. At the same time, the population-adjusted costs of mandatory spending programs -- driven by Medicare, including its new prescription drug benefit, and Medicaid -- have increased by over 30 percent. And, of course, defense spending has skyrocketed. But if you isolate domestic discretionary programs, a decade later we're spending no more on a per-person basis than we were back then.
Gods and monsters
As the Senate panel's and related data illustrate, unless you're talking about gutting the defense budget or wiping out healthcare for the elderly and disabled (dream on, Paul Ryan), there isn't any federal spending to cut to bring the deficit under control. And that's setting aside the damage to the U.S. economy likely to follow the massive government cutbacks that lawmakers are lining up as part of a deal to raise the country's borrowing limit.

Put another way, the fantasia in Washington over the debt ceiling itself rests on these two interrelated myths, which large swaths of the public have regrettably come to believe:

  1. Excessive discretionary spending is slowing economic growth;
  2. Boosting economic growth requires cutting excessive federal spending.
Both suppositions are wrong, and the second also happens to be the exact opposite of the truth. Since the financial crisis, government spending has been what is keeping the U.S. economy breathing. For how much longer, it's hard to say.


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    Alain Sherter covers business and economic affairs for