With the exception of Lafayette Park, you can’t go anywhere in Washington, D.C. without encountering heated discussion about the not-so-Super Committee. For weeks now, those who see reckless government spending (and the borrowing that entails) as a cause of our national economic woes have been hoping for sequestration over a typical beltway deal–i.e., one that raises taxes in exchange for phantom spending cuts that never materialize.
To be sure, the debate has been like a stone hitting the windshield of your car: it starts out small with ever widening fissures. Many normal alliances have been strained. Free market Republicans argue with neoconservatives about the wisdom of restraining defense spending.Democratic deficit hawks are called heartless by their liberal colleagues for being willing to curtail Medicare. The House of Representatives is sick and tired of waiting for the Senate to get off their derrieres and act. Meanwhile, President Obama does what he seems to do best – lecture the rest of us and then leave the country.
Now that the Super Committee has deadlocked and we’re in the finger-pointing stage, it is important to keep in mind that all these so-called spending cuts are actually reductions in the rate of increase in government spending. This point matters because it reveals the inherent bias built into almost every conversation about what needs to be done to get our country back on the path to a strong economic future. The consequences of failure are dire, as evinced by the collapse of Europe’s welfare states. As you can see here, the academic literature shows that the only way to reduce the debt to GDP ratio effectively is to implement packages comprised primarily of spending restraints (and, in a few cases, actual cuts). The split-the-baby approach of half spending/half tax increases fails to accomplish the goal.
But while we know that spending cuts are good economics, do they make sense politically? Interestingly enough, a new International Monetary Fund book shows that they do. After reviewing more than 60 instances of fiscal adjustments in Canada, France, the United States, Japan, Germany, and Italy, the authors found that ambitious fiscal plans aren’t penalized by voters. An interesting paper by Ben Broadbent and Adrian Paul called “Fiscal tightening need not be electorally costly, but it will test government unity” confirms these results. As they put it, “It is commonly assumed that cuts in government spending will be both economically painful and electorally costly. Neither is borne out in the data.” And, if that is not enough to make spin-doctors scratch their heads, the authors further conclude that while folks assume significant spending reductions will cost politicians at the polls, “if anything, the opposite is true.”
Or how about examples closer to home. The fiscal data shows that Reagan and Clinton were the most effective Presidents since World War II in controlling the growth of federal spending. And both of them served two terms and left office still riding high in the polls. In Canada, meanwhile, a Liberal Party government during the 1990 imposed a hard spending cap and was rewarded with re-election.
What does this mean? In a town that spends enormous resources “framing” issues to improve political positioning, results matter more than rhetoric. While the year ahead will bring us a fierce contest--akin to the $150 million poker match in Casino Royale--by far the greatest face card will be a rebounding economy and lower unemployment. Martini anyone?