A Headline from Bloomberg proclaims "Debt Deal Puts U.S. on Austerity Path as Economy Falters." This assertion, it seems, is the new conventional wisdom. Appealing to the economics of Keynes, Alain Sherter on Bnet faults the U.S. for drinking the "Austerity Kool-Aid." Derek Thompson at The Atlantic asserts that the debt deal is bad for U.S. economic growth because, it allegedly cuts government spending and "government is part of the economy." This conventional wisdom errs for at least two important reasons:
In the first place, the debt deal is not that austere. In fact, it does not cut a single dime in spending. It may plan to lower projected future spending growth, but it does not plan for any true spending cuts. It is a sad, sad commentary on contemporary understanding of political economy when a deal that allows for expanding government debt by $2.4 trillion over two years is greeted with howls of "Austerity!!!!"
Additionally, the idea that cutting spending hurts the economy is as upside-down as the Keynesian economic vision from which it stems. The government, contrary to the conventional wisdom, is not part of the productive economy. The government is a great consumer, but not producer. It is only by confusing GDP with the economy, that someone can believe that as government spending goes, so goes the economy. To the extent that the state gains revenue from anywhere it must take from the productive. Government spending merely takes scarce economic goods out of the hands
of private entrepreneurs and capitalists and transfers them to the government bureaucratic
class. There is no reason to believe that bureaucrats have either the ability or incentive to allocate scarce goods in productive investment. As I have said before, and no doubt will say again, government money cannot buy prosperity.
The exact opposite is true. Contrary to the new conventional wisdom, the lower government spending is, the better off our economy will be. With less government spending, the state will need to tax, borrow, and inflate less. Lower taxes, borrowing, and less monetary inflation, will both encourage saving and investment, which is the true source of sustained economic progress. Lower monetary inflation also will reduce distortions and malinvestment in the economy that are due to artificially lower interest rates and price changes that do not reflect economic reality. Even better macroeconomic policy would include cutting taxes and slashing spending enough to balance the budgets through spending cuts. It would also include ending the Federal Reserve altogether and move to a free market in money production.