No problem at all. She used to be a social security paper mis-pusher, now she is a barefoot doctor. Mao did it, why shouldn't we?
Ha
Oddly enough, that sort of thing is a key item in a recent
Joint Economic Committee staff commentary (from one party, ahem!) The paper discusses the idea "Spend Less, Owe Less, Grow the Economy" from a couple of economic viewpoints. Notably, they take the longer term Keynesian and NeoClassical views that lower government spending, with higher private spending, should provide greater economic growth.
There are some, ah, interesting points, though. They take a 'some from column A, some from Column B' approach to their economic philosophy, using only the bits the authors happen to agree with. While using the Keynesian argument that smaller deficits should lower interest rates and improve business investment in the long run, they reject the notion that cutbacks in government spending will have a contractionary short term effect from reduction in aggregate demand. There the authors argue that non-Keynesian effects will dominate and provide an immediate economic boost. (They use several small European countries as examples of this, but don't mention the extraordinary monetary stimulus applied while contracting the government to keep the economy moving.)
The nature and source of that economic boost are of interest to those of us working toward or in early retirement. There are some points of significant interest that I'll go over in a bit of detail.
Starting on Page 6, the paper describes effects on houshold purchases. When the government is running deficits and the level of spending is rising compared to GDP, they argue that households expect the government to raise taxes imminently or in the near future. If the government acts to reduce spending the fear of future taxation lessens, and folks will go out and buy more homes and cars. Hmmm...
On pages 6-7 the authors describe effects on business investment. This is where things get really interesting for us FIRE types.
- If the government reduces it's spending, short term uncertainty about taxes and fear of future large tax increases are reduced.
- Further, fiscal consolidation reduces the number and compensation of government workers.
- This increases the availability and reduces the cost of skilled labor to private firms.
- Since private firms have improved expectations based on reduced taxation fears and lower labor costs, their expected after-tax rate of return rises.
- Therefore, firms boost their investment in non-residential fixed assets in the short term!
- You fool! You fell victim to one of the classic blunders - The most famous of which is "never get involved in a land war in Asia" - but only slightly less well-known is this: "Never go against a Sicilian when death is on the line"! Ha ha ha...
Oh, wait. Ignore that last one. Anyone spot the gotcha in this line of reasoning? Anyone?
Economic activity picks up because... We made the supply of unemployed labor even larger than it already is, so firms can hire and pay even less ("reduce the cost of skilled labor"), which of course means that businesses can sell even more to those (underemployed/unemployed) workers. Hmmm... So all this time when I've been hoping the consumer sentiment survey would rise, I've been doing it wrong. For real recovery, we want it to FALL!
On the 'cutting government spending' side, we have the usual suspects:
- Decrease the number and compensation of government workers. Increases the available supply, lowers labor costs for private firms.
- Eliminate agencies and programs.
- Eliminate transfer payments to firms. Causes forms to cease otherwise unprofitable activities, produces gains in efficiency. Yeah, Koch Industries and Archer Daniels Midland are going to quietly go along with killing the ethanol subsidy right after they've built whole business units and lobbying divisions around it.
- Reforming and reducing transfer payments to households. I'll just quote the author's text here:
Reforming major programs of transfer payments to households, such as government pension and health insurance benefits for the elderly, to make them sustainably solvent in the long term increases the credibility of fiscal consolidation plans. Even if current beneficiaries are exempt from any change, the reforms are phased in slowly, and any short-term spending reductions are very small, the credibility of fiscal consolidation plans will be enhanced. Moreover, reforming government pension and health insurance benefits for the elderly in the future will induce younger workers to increase their current saving, to work more, and retire later, thus boosting real GDP growth.
That'll spiff up the ole FIRE plan. I'm pretty sure 'reforming' doesn't mean giving the elderly more benefits, or a nice COLA. But, yeah, it should be a good incentive for younger workers to increase saving, work more, and retire later. Yay, fear!