On today’s NPR Morning Edition, the Wall Street Journal’s David Wessel explained why the U.S. cannot cut spending, saying that the U.S. doesn’t believe belt-tightening is the way to prosperity and that we’re more concerned about the immediate recovery. This was in response to the news that the British government is cutting 500,000 government jobs, slashing spending by 25 percent, including a 19 percent cut in welfare spending, and changing the state pension age for men and women to 66 by the year 2020.
I wonder what is so different about the United States that Wessel thinks that spending can’t be cut here. For one thing, we know that stimulus spending hasn’t helped the country recover so far. And it’s not for lack of spending. Even prior to the adoption of the $789 billion ARRA bill in February 2009, the country had been widely stimulated by government spending as it grew by almost 90 percent in the last ten years.
Probably more important are the lessons we can learn from other countries who have cut spending to get back on their feet. A recent paper by David Henderson of the Hoover Institution looked at how Canada cut its spending, reformed its safety net, and got rid of many budget gimmicks in the 1990s. The result was a drop in debt as a percentage of GDP from 69 percent in 1994 to 29 percent in 1998. Before these reforms, the country wasn’t doing well at all, its currency was in bad shape, and many people thought spending couldn’t be cut. Yet the Canadian government did it, and the country was better off for it.
And then there’s this paper by Alberto Alesina of Harvard University, who makes the case that countries that addressed their fiscal troubles by cutting spending were more likely to recover than the ones that tried to address their troubles by increasing taxes. In addition, the spending cutters were rewarded at the polls.
By the way, the United States has done it in the past. After World War II, the debt as a percentage of GDP has reached 109 percent. And yet the country managed to cut spending dramatically and the private sector managed to absorb all the men who were leaving the Army very successfully.
The definition of insanity is to continue to do the same thing, over and over again, expecting a different result. It would be insane for the United States to not change its course now and to continue spending. Let’s give spending cuts a chance.