Does the United States Have a Spending Problem?
While Washington debates spending cuts some deny there is even a problem.
by Drew McKinley
In the New York Times yesterday, Paul Krugman continued his attempts to convince the American public that cutting the federal deficit is not only unnecessary, but also dangerous. However, Krugman seems to have missed some fine details along the way.
The first mistake Krugman makes is an assertion that there is no chance of a decline in the purchase of United States debt through bonds. He writes, On one side, weve been warned, over and over again, that bond vigilantes will turn on the U.S. government unless we slash spending immediately. Yet interest rates remain low by historical standards; indeed, theyre lower now than they were in the spring of 2009, when those dire warnings began. In response to the first part, the worlds largest bond fund, Pimco, dumped all of its U.S. government securities this month. The reason given by Pimco chief Bill Gross was over-valuation of treasuries and artificially low interest rates. To the second part, interest rates are at historic lows because the Federal Reserve bought 80% of government securities in the first seven months of 2009. Touting artificially low interest rates as proof that the United States government is not in any fiscal danger denies the underlying trends in the securities market. Last November the U.S. Government Accountability Office stated that absent additional policy actions the federal government faces unsustainable growth confirming that concern over the federal governments deficits is indeed warranted.
Second, Krugman readily dispels the idea that cutting the budget deficit will increase business confidence by citing the recent austerity measures taken by the United Kingdom and reporting that British business confidence plunged. However, there is more to the story. Perhaps business confidence has plunged because the cuts made in Britain were fiercely protested and still did not solve the over-arching problem of big government. Or perhaps because the National Health Service ran a £24 billion deficit in just the month of November 2010. Instead of Britain, maybe Mr. Krugman should look at how Canada cut its spending in the 1990s. While Canada lowered its spending, (1) it experienced similar growth as the United States during the same period (2).
Finally, Krugman cites a Pew research poll that a majority of Americans see not much difference between how President Obama and the Republican Congress approach deficit spending. This is because there is essentially no difference between their respective proposals. Democrats and Republicans proposed spending cuts of roughly $60 billion and Democratic proposals of $4.7 billion, and while the Republican plan does cut substantially more it still is too little to change Americas fiscal future woes. However, this doesnt mean that the deficit can be left to continue ballooning. What we need are real reforms to discretionary spending, entitlements, and tax reform.
Drew McKinley is a Milton Friedman intern with the Illinois Policy Institute. More information on the internship is available here. We are currently accepting applications for the summer internship, but hurry – the deadline is March 31.