"Why government cuts won't hurt growth"

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From Shawn Tully at Fortune.com:

"S&P has a point: We need to cut more spending."

"...the Keynesian argument that lower government spending automatically hampers GDP growth... is far from the sure thing its champions keep trumpeting. Many eminent economists, from Eugene Fama of the University of Chicago to Allan Meltzer of Carnegie Mellon, take a totally different view.

... the utter failure of the $862 billion "stimulus" to produce a robust recovery should encourage Americans to listen carefully to the view that more spending did little or nothing to raise GDP in the past two years....

"It's crucial to understand the logic behind the "spending-equals-growth" argument... Keynesians believe in something called the "multiplier effect."

"...for example, if new outlays rise by $1 trillion, and the multiplier effect is 1.2 ... GDP will jump by an extra $1.2 trillion. In that scenario, Americans can have more teachers, solar energy subsidies and bridges without sacrificing a dime in corporate investments or consumer spending.

"But that math could be bunk...

"The stimulus skeptics ... argue that the multiplier doesn't exist, and that by simple accounting, every dollar in government spending must reduce another part of GDP by an equal amount, resulting in a wash.

"The money you lend the government has to come from somewhere," says Cochrane. "The stimulus is just moving the same money around."

...The second group of economists...  acknowledge that higher borrowing and outlays may temporarily raise growth. But they claim that the immediate bump in output is far weaker than its advocates maintain, and that the longer-term effects of the big borrowing and spending are extremely damaging.


..."The stimulus and multiplier effect were way oversold... Germany and Britain are cutting spending, and they're doing better than we are."

...The skeptics are an impressive group, and they deserve a prominent place in the debate... why hasn't all the spending resulted in better growth and more jobs?"

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Link: http://finance.fortune.cnn.com/2011/08/08/why-government-cuts-wont-hurt-growth/