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A Fiscal History Lesson

By David Henderson.

We often hear that big cuts in government spending over a short period of time are a bad idea. The argument against big cuts, typically made by Keynesian economists, is twofold. First, large cuts in government spending, with no offsetting tax cuts, will lead to a large drop in aggregate demand for goods and services, thus causing a recession or even a depression. Second, with a major shift in demand (fewer government goods and services and more private ones), the economy would experience a wrenching readjustment, during which many people would become unemployed, and the economy would slow down. But if such claims were true, wouldn’t history confirm them? And wouldn’t the decline in the economy be large when the government cuts spending a lot? That’s certainly what the late Keynesian economist Paul Samuelson thought. Well, Samuelson was wrong, and not just wrong, but spectacularly wrong.

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