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Why can't we cut our way to prosperity?

In his weekly radio address today, President Obama said, in regard to the upcoming talks he will be having with Congressional leaders over reviving the stalled budget negotiations, "we can't simply cut our way to prosperity."

He might do well to consider the record of the Clinton administration. As these charts show, federal spending as a % of GDP fell 4 percentage points—from 22% to 18%—during the 1993-2000 period, thanks mainly to 8 years of very low spending growth: 3.1% on average. During that same period, real GDP grew at an annualized rate of 3.8% per year, well above its long-term 3.1% per year average, and the unemployment rate fell from 7.4% to 3.9%.

During that same period, rising prosperity resulted in a surge of federal tax receipts, which rose from 17% of GDP to 20%, as revenue growth averaged 7.8% per year. The combination of very slow spending growth and a strong economy reduced the budget deficit from 5% of GDP to a surplus of 2.5% of GDP. And thanks to the combination of strong growth and tight monetary policy, the dollar rose 20% during this period, further boosting confidence and investment.

The hallmarks of policy during the 1993-2000 period are exactly what we need today: 1) sharply curtailed spending growth and 2) tighter monetary policy. It's not a coincidence that explosive spending growth and easy money have given us the slowest recovery on record. Moral of the story: you can't simply spend your way to prosperity.

UPDATE: To expand on this most important of themes: You can't spend or print your way to prosperity; prosperity comes only from hard work and productive investments. Government doesn't know how to do either very well, since it lacks the profit motive, and politicians have the luxury of spending other peoples' money instead of their own. Printing money doesn't create prosperity because it only fosters speculation and destroys confidence in the value of a currency. The worst thing about policies of the past several years (including the Bush administration) has been the reliance on policies (e.g., lots of government spending and easy money) that don't make any sense, but which sound good because they supposedly put the politicians and the bureaucrats in charge of pulling the economy out of a slump that they themselves (of course) were responsible for creating. The Keynesian belief that politicians and bureaucrats can pull spending and money levers and thus turn around the economy have once again been totally discredited. How long will it take before we as a country learn this lesson?

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