Last week I wrote about Donald Trump’s dumbfounding decision, as the Republican frontrunner, to advocate for increasing taxes on the wealthy. I left for today commentary on the amazing interview Ohio Governor John Kasich did with the Washington Post Editorial Board. Essentially Gov. Kasich believes that we can obtain economic growth through spending cuts. (Just to be clear why this is on a tax blog: spending and taxes go together like peanut butter and jelly).
It seems most pundits are speculating that there will be a contested Republic convention in Cleveland. It has also been speculated that in that environment, a wildcard like, Gov. Kasich or Rep. Ryan, might end up the nomination. Both Gov. Kasich and Rep. Ryan appear to hold the same position that spending cuts are good. They believe that spending cuts plus tax cuts (I will address the tax cuts issue in a later post) will actually increase overall tax revenues through overall economic growth. It is not surprising that the two Republican establishment figures would hold such a belief. This principle is alignment with popular thinking: polls show many Americans think spending cuts will have an economic benefit by a 55 to 18 percent margin.
I think, therefore, it is worth exploring why spending cuts as related to growth (economic and job) is not at all mainstream economic thinking. But like all issues, here we have a complicated discussion. It may be true that spending cuts help balance the budget which may grow the economy in other dimensions. But spending in a recession, as most economic data seems to show, is the main way forward for job growth and to exit the recession. Most mainstream economists believe: (1) that spending increases job growth on a temporary basis; (2) a reduction in spending will unwind the growth back to the baseline without spending; and (3) job growth will grow the economy. However, in no way is there permanency attached to spending as related to job growth. (This is the reason that Bernie Sander’s forecasts are of job growth in his plan are incorrect. See this study.)