Austerity and Boom Times

Greece and California are deeply in debt forcing them to make huge cuts in services. This is causing mass protests. The protests in California have been fairly restrained but Greece has near-riots. The UK is also facing growing debt. All of these governments are in debt because of the general financial problems but this points out an economic paradox - governments have no incentive to shrink, only grow.

In good times the taxes come rolling in and government expands. No bureaucrat ever wants to let money go unspent. With federal governments, politicians go a step further and spend money that they don't have, running up the national debt.

Bad times inevitably come. President Obama has talked about breaking the boom and bust economic cycle but that is likely impossible. Private businesses respond to economic slumps by downsizing and taking out loans to tide them over. These are repaid when times are better.

Here is the problem. During an economic downswing, there is a lot of pressure on government to keep its spending levels the same. At the same time, it is under economic stress. Costs like unemployment go up while tax revenue goes down.

Many economists on the left say that deficits do not matter. Lead by Paul Krugman, they insist that no level of spending is too high but most are too low. Krugman insists that Japan's Lost Decade was caused because the Japanese government's stimulus spending was too small. He suggests, with a straight face, that a stimulus equaling a country's annual GDP is appropriate, if a little low.

Under pressure from its own citizens and the US (and Krugman), the UK lead Europe in stimulus spending. Now it is in economic trouble.

A major obstacle to government spending cuts during an economic downturn is the fear that it will make the downturn worse. Sometimes taxes are raised but this just creates increased spending during the next boom cycle.

The result of all this is governments spiraling out of control. Sometimes things get bad enough that some cuts can be made. In the late 1970s and early 1980s, Margaret Thatcher made some cuts in the UK. Ronald Reagan made some cuts but these were mainly in the speed of growth.

Right now there is no push for limiting government (except for the Tea parties). The Democrats are trying to increase government size and spending. This will inevitably lead to a crisis. The best we can do for at the moment is to resist growth from the Democrats and hope that a re-energized Republican party will be less spendthrift.