How to cut government spending

Paul Krugman, among many others, raises the Keynesian argument against cutting government spending in a downturn.  Yet cutting spending  is easier to do than these accounts make it seem.  Cut the rate of growth of government spending on health care:

1. It is one sector where supply constraints often bind.  Releasing some of those resources from pursuing government subsidies will lead to their relatively rapid redeployment elsewhere.  For instance if you cut the rate of growth of Medicare spending, some more doctors are likely to start accepting Medicaid patients.  And job growth in the sector is robust, even these days.

2. The policy is cutting a rate of growth, rather than cutting current spending in absolute terms.  This may lead to sectoral readjustment problems for some people who are planning careers in health care, but it leaves current revenue streams intact and indeed it is still likely to grow them by some amount. Fairly often I see Keynesian opponents of “spending cuts” confuse absolute cuts with cuts in the rate of spending growth; the latter involve much smaller Keynesian problems.

3. There is a nice cushion of rents in the medical sector, and that makes it easier to cut spending there too.

4. Spending too much time with aggregate AD and AS curves causes one to overlook some of these cross-sectoral distinctions.

5. We also could and should cut farm subsidies, which go largely to agribusiness.  It’s part of the Keynesian argument today that wealthy corporations are just sitting on their cash.  I don’t buy that as stated, but if it will convince Keynesians to call for an immediate end to farm subsidies, so much the better.  We now can cut farm subsidies altogether and the rate of growth of government spending on health care; that’s two areas right there.

6. Let’s not forget defense spending.  Not all of those cuts need be a Keynesian disaster.

7. It is the so-called “discretionary spending” where Keynesian arguments are most likely to hold.  Not surprisingly, that seems to be the area where we are most determined to cut spending.  Silly Americans!  Given that, is our government an institution you should trust to enact good Keynesian policy more generally?

Not all government spending is created equal, for Keynesian purposes or otherwise.  There is plenty of spending we could cut without creating a Keynesian disaster, even if you accept the Keynesian framework straight up.


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