Cuts and Consequences – How Budget Cuts Hurt The Economy

Is smaller government really better for the economy? Conservatives chant that taxes and government “take money out of the economy” and we need to “cut and grow,” meaning if government spending is cut way back the economy will grow as a result. Europe’s conservatives are also forcing cuts in the things their governments do for regular people, claiming “austerity” will bring “confidence” that grows their economies. How is this experiment working out? What are we learning about the effect on the larger economy when government is cut?
What Does Government Do?
Almost everything the government does is because it needs to be done. We need roads, bridges, schools & colleges, dams, courts, police & fire departments, water management, etc. (We can discuss the need for military spending another time.)
These are all needed and contribute to the functioning of the economy. So if government is cut back and doesn’t do something that is needed, then how does it get done? Or does it just not get done? Either way, the real question we should be asking is what is the effect on the larger economy when our government cuts back on or stops doing needed things? If you save the “government” a bit of money but cost the economy a lot of money, are you saving money? Or are cuts in government really just shifting and even increasing the costs in the larger economy of doing these things?
Who Is Our Government For?
In the United States, our Constitution says that government is supposed to be of, by and for We, the People. The country was established after the colonists rebelled against the aristocracy of England — a few people who had all of the wealth and power and would not let the colonists have a say in how things were run and who would benefit. So they fought the Revolutionary War and established a country where “We, the People” all have an equal say, and to “promote the general welfare.” In other words, a country that aspires to be of, by and for the good of all of us.
So cutting back on government means cutting back on We, the People doing things for the good of all of us. It means cutting back on the things we have a say over. It means relinquishing the wealth and power that we hold in common to … well, just where does our common wealth and power go if our government is cut back?
Medicare, For Example
Republicans say we need to cut back on what the government spends on Medicare. But if you cut Medicare the health problems of elderly people and the larger problem of fast-rising health care costs in the larger economy don’t disappear. In fact, both problems just get worse.
The “Ryan Budget” that Congressional Republicans voted to approve actually converts Medicare into a program that gives seniors a voucher that pays for part of a private medical insurance policy that seniors have to shop for. The Center for Economic and Policy Research (CEPR), in Cost of Medicare Equivalent Insurance Skyrockets under Ryan Plan, took a look at that plan and explains what happens to the cost of health care. Summary: it shifts the costs to us, except each of us ends up paying as much as seven times as much as the same care costs under Medicare. From the CEPR explanation:

[The Republican] plan to revamp Medicare has been described as shifting costs from the government to beneficiaries. A new report from the Center for Economic and Policy Research (CEPR), however, shows that the [Republican] proposal will increase health care costs for seniors by more than seven dollars for every dollar it saves the government, a point missing from much of the debate over the plan.
… In addition to comparing the costs of Medicare to the government under the current system and under the [Republican] plan, the authors also show the effects of raising the age of Medicare eligibility. The paper also demonstrates that while [the Republican plan] shifts $4.9 trillion in health care costs from the government to Medicare beneficiaries, this number is dwarfed by a $34 trillion increase in overall costs to beneficiaries that is projected …

Repeat, the Republican plan to cut Medicare would cost the larger economy seven times as much as it cuts government spending.
Social Security, For Example
Conservatives have been trying to cut or gut Social Security for decades. While this might mean government has to pay out less of what is owed to seniors, such cuts would have a negative effect on the larger economy.
Social Security allows working people to retire with at least a minimal income. If this is cut many could not retire for many more years (if ever), which would increase the unemployment rate because their jobs would not open up. The same is true as the retirement age is increased – fewer job openings. If it is cut, the spending (on cat food) at local grocery stores and other necessities is reduced by the same amount. And the effect on children of retirees is increased, if they contribute to make up the difference.
This is why cutting Social Security or raising the retirement age only shifts costs onto the larger economy, dragging it down (and cruelly hurting our elderly).
Cutting Disease Control, For Example
One of the clearest examples of the way government helps us all, rich and poor, is the government’s Center for Disease Control (CDC). One of the jobs of the CDC is to help prevent the spread of infectious diseases. If an epidemic is spreading and killing people it doesn’t matter if those people are rich or poor. And if a serious outbreak spreads this can damage the economy as people are too sick to, or decide not to show up for work. So of course cutting back the budget of the CDC could cause damage to the economy in any given year and is certain to cause damage eventually. (The CDC budget was cut back 11% last year.)
Budget Cuts Hurt The Economy
The above are only a few examples.
A government budget cut is like a huge tax increase on regular people because it increases what each of us pays for the things government does — or forces us to go without. This is because cuts in government spending don’t actually cut the cost or the need for those things, they just shift those costs onto the larger economy. But because these shifts attack the economy-of-scale, transparency, integrity and public-good management that government provides, they almost always increase the costs and harms to the larger economy.

  • As government health care is cut (or not provided in the first place) each of us must take on those costs on our own, and as demonstrated, pay up to seven times what the same care would/could have cost.
  • As infrastructure maintenance and modernization is cut, our economy becomes less competitive, unemployment increases and our wages and spending power fall.
  • As spending on education is cut, our costs of educating ourselves and our kids increase. College costs soar. And the overall education level of our people will decrease, making our country less competitive in the world.
  • As environmental regulation and enforcement is cut the costs of the resulting health problems and cleanups increase and our quality-of-life will decrease.
  • As enforcement of labor laws is cut, our wages and protections fall.
  • As etc. is cut, the costs of etc. are shifted to the larger economy, and the total costs of accomplishing etc. actually increase.

As budgets are cut, the costs are increased and shifted to the larger economy.
Austerity In Europe
Several countries in Europe are severely cutting budgets. The result is that the economies in those countries are slowing. Reuters: Euro zone’s slump in late 2011 points to recession.

A collapse in household spending, exports and manufacturing sucked the life out of the euro zone’s economy in the final months of 2011, the EU said on Tuesday, showing the scope of the downturn that looks set to become a fully fledged recession.
… The European Commission forecasts a recession of the same magnitude this year. That would be the euro zone’s second contraction in just three years as the bloc’s debt crisis drags on a region that generates around 16 percent of the world’s economic output.
[. . .] The battle between austerity and growth was already evident in the fourth quarter. Euro zone government expenditure fell 0.2 percent, while industry contracted 2 percent and imports were down 1.2 percent, making for some of the worst readings since the world was dragged into the 2008/2009 financial crisis.

The austerity experiment is making the case: cutting government budgets just shifts costs and hurts the larger economy.
Who Benefits From Cuts?
Governments dance with the ones that brung ‘em. Whoever controls government is naturally going to direct government to benefit them – and only them. We-the-People democracies do things for We, the People; plutocracies do things for plutocrats. So when, as now, plutocrats are running government, you will get a government that only does things that benefit plutocrats. And when We, the People were running government, we did things that benefit We, the People — all of us.
The plutocrats now demanding government budget cuts obviously understand that this will result in slowing economies, but don’t care — they are already fabulously wealthy. What they want is reduced taxes and increased power. They say that cuts will bring growth, in order to persuade people to accept cuts. Blocking governments from providing things that don’t directly benefit them and only them is a means to that end. And cutting government cuts government’s ability to reign them in.
What We, the People Want
When We, the People are running government we insist that government increases overall prosperity. We demand laws and regulations that bring us good wages, benefits and safe working conditions. We demand good public schools & colleges, parks, safety and opportunities for our smaller businesses to fairly compete. We insist on a clean environment, consumer protections, regulations on business behavior, rules against monopolies and (after learning the hard way) rules that keep banks from taking risks that threaten the economy. And we want controls and limits on the use of wealth and power by the 1%ers.
Plutocrats — the 1%ers — of course see all of these protections of regular people as hindering their power and ability to make as much for themselves as they can grab. Plutocrats just don’t see how public parks benefit them. They just don’t see why they should have to pay for public schools. What good do public schools do them, today? Plutocrats don’t see why it should be anyone else’s problem if old people don’t have health care — health care for seniors certainly isn’t their problem.
They explain that things for anyone other than themselves and their interests just “wastes money.” Things for regular people are not their problem. And when plutocrats run government, it isn’t their problem.
The fact is a public park “costs money.” Schools and infrastructure are just more “government spending.” Things like that just “redistribute income” because taxes on the income of plutocrats is used to build that park or school that anyone can use. The basic message of the plutocrat is, “Why should I pay for anything that benefits you?”
You and I might argue that this kind of austerity, cutting schools, Medicare, infrastructure, etc. slows the larger economy, hurting the plutocrats, too. But that doesn’t hurt the ones who are already rich, which is the definition of plutocrat. It puts more in their pockets, today, by lowering their taxes. They want out of taxes and they don’t want government (We, the People) interfering with their power.
What We, The People Need
Democracies where We, the People make decisions demand things that are good for regular people and their small businesses: pensions, health care, modernized infrastructure, good schools & colleges, child care, regulations on the behavior of giant corporations… This is why strong democracies have proven to be more prosperous for regular people and for longer than other forms of government that leave people on their own against the wealthy and powerful and drive all of the income and wealth to a few at the top. This is why so many regular working people in our country were so much more prosperous in the decades before the plutocratic 1%-favoring policies of Reagan steered us toward plutocracy.
Understand what is going on here. Demands for budget cuts and austerity are really about shifting from democracy to a system where regular people — the 99% — are on their own, up against the wealthy and powerful. This is about shifting from a system where regular people can be prosperous together, to a system where a few — the 1% — have all the wealth and power.
We, the People need democracy restored. We need to be in charge again, before the economy can improve.
This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.
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