Job-Killing Spending Cuts

By :: July 15th, 2011

There has been a lot of talk in Washington recently about “job-killing tax increases.” Raising taxes, the argument goes, would lead businesses to hire fewer workers and stifle our already weak economic recovery. But I haven’t heard anyone talking about “job-killing spending cuts.”

In macroeconomic terms, tax increases and spending cuts have qualitatively the same effect on the economy (but the quantitative impact could differ, depending on incentive and efficiency effects). Both reduce aggregate demand for goods and services. A dollar taken in tax means taxpayers will spend less. A dollar reduction in government transfer payments means recipients will spend less. A dollar less government spending on goods and services cuts demand directly. If anything, cutting government purchases lowers demand more than an equal-dollar tax increase because the former reduces demand dollar-for-dollar while some of higher tax payments will come from savings, thus tempering the drop in demand. (Reduced transfers also have a smaller effect because beneficiaries will use savings to offset some of the lost income.) And, of course, the biggest impact on jobs comes when cutting spending means laying off teachers and other government workers.

The Congressional Budget Office yesterday issued a report discussing the short- and intermediate/long-run effects of reducing the deficit. The bottom line for the short-run:

In the short term, while the economy is relatively weak and economic growth is restrained primarily by a shortfall in demand for goods and services, the reduction in federal spending or increases in taxes that would produce smaller deficits would decrease the demand for goods and services even further and thus reduce economic output and income. (p. 3)

More specifically, CBO concluded that cutting spending and increasing taxes enough to reduce the federal budget deficit by $2 trillion over the next decade (ramped up from $100B in 2012 to $300B by 2021) would reduce real GDP by between 0.1 percent and 0.6 percent in the next three years, “depending on the year and the assumptions used.” In the longer run, reduced deficits would increase GDP because individuals and businesses would save and invest more.

CBO did not assume any particular combination of spending cuts and tax increases used to reduce the deficit. That choice would affect how much a particular policy would reduce GDP in the short run but not the basic fact that either approach to deficit reduction would harm the economy over the next few years.

I don’t like politicians using the pejorative term “job-killing” to describe any economic policy. The term works in sound bites but makes serious discussion more difficult. But if people are going to use the term in discussions of deficit reduction, they should apply it equally to both tax increases and spending cuts.

10Comments

  1. Michael Bindner  ::  5:01 pm on July 15th, 2011:

    Don’t let truth get in the way of conservative dogmatism. Also, not all tax cuts are job killing – those which fall on the savings sector would tend to encourage spending, all things being equal, including spending on new employees if the alternative were taxation.

  2. Vivian Darkbloom  ::  5:51 pm on July 15th, 2011:

    “In macroeconomic terms, tax increases and spending cuts have qualitatively the same effect on the economy (but the quantitative impact could differ, depending on incentive and efficiency effects). Both reduce aggregate demand for goods and services.”

    Is that so? I suspect that Reinhart and Rogoff might beg to differ. I agree that ‘job killing’ tends to be rhetorical hyperbole, but on the other hand, there seems to be strong evidence that at the current level of US debt to GDP, tax increases would have a more significant damping effect on GDP than would spending cuts. And, I think, there is more than a little correlation between GDP growth and jobs.

    http://www.bloomberg.com/news/2011-07-14/too-much-debt-means-economy-can-t-grow-commentary-by-reinhart-and-rogoff.html

  3. Steve  ::  3:31 pm on July 16th, 2011:

    Good point. We might also ask about the conservative fixation on business owners as job creators. Businesses will hire more employees when their customers start spending more. Customers create jobs, but to do it they need more money.

    Why aren’t conservatives demanding an economic policy delivers more money to potential customers? Kind of like a stimulus, or something. One almost get the impression that they don’t particularly care about jobs. But, if not jobs, what could it be?

  4. AMTbuff  ::  11:15 pm on July 16th, 2011:

    We don’t know where the tipping point is until we pass it. Once that happens we’ll see that a bond market crash, probably followed by hyperinflation, is a job killer like no other. Does it make sense to kill some jobs to avoid a crash? Absolutely. Is it necessary to do so now? Nobody knows.

  5. Vivian Darkbloom  ::  3:50 am on July 17th, 2011:

    “In macroeconomic terms, tax increases and spending cuts have qualitatively the same effect on the economy (but the quantitative impact could differ, depending on incentive and efficiency effects). ”

    Is that so? You should read Alesina and Ardagna on the comparative effects of tax increases versus spending cuts in successful fiscal consolidations:

    Alesina, A., & Ardagna, S. (2009). Large Changes in Fiscal Policy: Taxes Versus Spending . NBER Working Paper No. w15438 .

    http://www.nber.org/papers/w15438

    And, you should read the following statement by Andrew Biggs before the House Ways and Means Committee on the same general subject:

    http://waysandmeans.house.gov/UploadedFiles/Biggs_–_Ways_and_Means_Testimony.pdf

    Merely writing that tax increases are equivalent to spending cuts as regards their macro economic effects does not make it true. Where is your empirical evidence, Mr. Williams? And, are we talking about effects over six months or six years or twenty years? The current discussion is over necessary long-term changes to taxing and spending policies to reduce the deficit, not short-term stimulus measures intended to get us past the next election.

  6. David R  ::  1:49 pm on July 18th, 2011:

    Only tax increases are “job killers”. Spending cuts actually create jobs, at least in the alternative universe that Conservatives live in.

    Spinning the position is what this ia all about, as described here

    http://dismalpoliticaleconomist.blogspot.com/2011/07/death-tax-entitlement-reform-and-making.html

    With respect to “job killers”, there is this from that post.

    “Term: Job Killing Taxes

    This is an example of a negative reinforcing a negative. Everyone is opposed to taxes, but they are necessary for funding government operations, which everyone is at some level in favor of. So a strong anti-tax message needs more negativity, in this case not only taxes are bad but they are “job killers”. This allows proponents to ignore the fact that there are “job killing cuts in government spending”

    Example: After the government takes away our guns the only thing we can use to kill with are job-killing taxes. My cousin Orrin got three of em just last week with an excise tax.”

  7. Nadia Hassan  ::  7:52 pm on July 18th, 2011:

    Great point, but the stuff about spending cuts as “job-killing” is more applicable during downturns and recessions. At low unemployment and high interest rates, government spending can result in crowding out.

  8. Tom  ::  8:24 pm on July 18th, 2011:

    A transfer payment takes money from A and gives that money to B, which means A has less money to spend and B has more. Transfer payments do not necessarily mean an increase the overall amount of spending in the economy, nor would a reduction in transfer payments mean a reduction in overall spending. By focusing simply on the recipient you are ignoring the contributor of the transfer payment.

    And while you may shed tears over government workers losing their jobs, the private sector has by far bared the brunt of job losses since the recession. The private sector has lost over 6.6 million jobs or a 5.8% decline since the beginning of the last recession in December 2007, the public sector on the other hand has lost only 0.3 million jobs or a 1.4% decline. Where is your sense of fairness now, your yearning for equity, your demand for social justice, your false tears for equality when comes to job losses in the private sector vs. the public sector?

  9. Wanita Demsey  ::  6:15 am on November 26th, 2011:

    As I mentioned in the last post, Social Security is a legal pyramid scheme. The benefits currently being drawn come from people currently paying into the system.

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