Austerity lovers of the world take note: Cutting government spending hurts the economy and it's not just the Paul Krugmans of the world that say so.
The American Enterprise Institute, a conservative-leaning think tank, has some data out indicating that cutting government spending may be off-setting private sector growth. That's notable, especially when coming from an organization with the motto "Freedom. Opportunity. Enterprise."
Public sector GDP -- a measure of the goods and services produced by the government -- has shrunk for eight consecutive quarters, according to AEI. At the same time, private sector growth has increased for 12 quarters in a row, indicating that America’s slow overall GDP growth may mostly be a result of a drop in government spending.
In just the last year, federal spending has fallen more than 3 percent, and the cuts may be countering private-sector growth, the Wall Street Journal reports.
The findings show that slashing government spending may not exactly be the best way to boost the economy, even though that’s exactly what lawmakers around the world are considering. That some of the data comes from conservative-leaning AEI adds fuel to the arguments of progressive economists, who argue that painful austerity measures don’t help economies in trouble; they hurt them.
The findings also do some to discredit conservative economists like Mitt Romney advisor Glenn Hubbard, who argue that cutting federal spending would boost a lagging economy.
Of course, not everyone in Washington fears austerity. Treasury Secretary Timothy Geithner argued earlier this month that the looming “fiscal cliff” -- a combination of tax increases and spending cuts that are set to go into effect at the end of the year -- would not actually do “a lot of damage” to the U.S. economy if Congress didn't take action to stop it.
President Obama took heat in June when he told reporters that the private sector is “doing just fine” in an aim to pressure congressional Republicans to help fund struggling state and local governments. Left-leaning economist Paul Krugman said that while Obama “bungled the line,” he was right to note that what’s hurting the recovery are cuts to the public sector.
But concerns over cuts to government spending aren't just an American problem. Across the Atlantic in Greece, leaders agreed to a package of spending cuts demanded by its creditors, even as the country struggles with high unemployment.
Check out some more Krugman lines here:
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