Discuss: "Lower Government Spending Will Not Weaken The US Economy. It Will Strengthen It."

Diogenes

Diogenes

Nemo me impune lacessit
2_UaUIHJ



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The Federal Reserve Bank of Atlanta’s GDPNow model projection for real GDP growth in the first quarter of 2025 (Q1 2025) is now showing a slump to -1.5%. This marks a significant downward revision from the previous estimate of 2.3% on February 19, 2025.

gdpnow-forecast-evolution_1.jpg


Such an enormous decline is strange. How did we go from +2.3% to -1.5% in less than a month? That kind of collapse in an economy as large as the United States is exceedingly rare.




gdpnow-forecast-evolution_1.jpg


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The immediate reaction from the media is to call this the beginning of a “Trump recession” and blame it on President Trump’s policies.

Interestingly, on June 1, 2022, the Atlanta Fed GDPNow estimated the second quarter of 2022 growth at +1.3%.

By July 1, 2022, it had dropped to -2.1%, a shift of 3.4 percentage points in 30 days.

What did the media call it? “Growth scare”.

A similar thing happened in the third quarter of 2021. The estimate fell from 6.1% (July 30) to 2.3% (October 1), a 3.8-point drop over two months.

In 2022, real GDP declined for two consecutive quarters under Biden’s administration.

According to the Bureau of Economic Analysis, the first quarter saw a decrease of -1.6% in the annualised rate, followed by a 0.6% drop in the second quarter. Hundreds of analysts, commentators, and economists, along with the NBER, swiftly declared that this was not a recession.

Thus, it is hilarious to read the hundreds of comments arguing that the Atlanta Fed NowCast means that the new administration’s policies are causing a recession.

As I wrote a few months ago, the United States has been in a private sector recession for months. However, an abnormal increase in government spending during a period of growth and a risky borrowing policy led to a bloated Gross Domestic Product (GDP).

The United States had a $7.59 trillion nominal GDP increase between 2021 and 2024 compared to a rise of $8.47 trillion in government debt.

This marks the worst GDP growth adjusted for government debt accumulation since the 1930s.

Many analysts are warning that the Department of Government Efficiency (DOGE) efforts will cause a recession if government spending is aggressively reduced.

However, cutting spending may “reduce” GDP but does not harm productive economic growth; it will likely strengthen it.

We must remember that US government spending financed by increasing federal debt accounted for about 22% to 25% of the total US GDP growth over 2021–2024. This extraordinary increase in government spending in the middle of a recovery led to record-high government debt and was the leading cause of money supply growth and, with it, the inflation burst that Americans are suffering today.

A research study from MIT Sloan published on July 17, 2024, by Mark Kritzman et al., titled “The Determinants of Inflation,” concluded that federal spending was the overwhelming driver of the inflation spike in 2022, estimating it was two to three times more significant than any other factors.

Government spending was out of control, leading money supply growth to soar, and the cumulative inflation suffered by Americans in the past four years is over 20.9%, with groceries and gas prices rising by more than 40%.

Excessive government spending was not only the cause of the rise in money supply growth and the burst of inflation but also led to an $8.47 trillion increase in debt and an unsustainable path to financial ruin if policies remained the same.

According to the Congressional Budget Office, with no policy changes, the United States would have accumulated deficits of $12.6 trillion between 2025 and 2030. Net interest outlays were expected to grow from $881 billion in 2024 to $1.2 trillion by 2030, even assuming no recessions or unemployment increases.

Cutting government spending is essential to reduce prices, bring inflation under control and stop the looming public finance disaster. By 2024, it became evident that revenue measures would not reduce the United States federal deficit.

Deficits are always a spending problem.

Private GDP should measure the economy, as government spending and debt do not drive productive growth.

Stripping government spending can give us a more accurate picture of the reality of the productive sector in America.

The latest Atlanta Fed estimates show a massive decline in net exports (-3.7%) due to a large increase in imports, a small decline in consumption of goods (-0.09%) but strong services (+0.62%) and rises in government expenditure (+0.34%) and a healthy increase in investment (+0.62%).

Thus, the surprising factor is an abnormal slump in exports and a rise in imports that may be revised, because the trade deficit in December 2024 rose to a record $98.4 billion and GDP did not reflect such a massive slump in net exports. The concerning thing is that government spending continues to be excessive, and the United States is running an annualized $2.5 trillion deficit.

The United States will not enter a recession due to the change of administration, but because of the excess spending policies of the Biden years. Reducing federal spending, deficit, and debt accumulation is essential to recover the health of the economy.







Lower Government Spending Will Not Weaken The US Economy. It Will Strengthen It... | ZeroHedge

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The idea that lower government spending will strengthen rather than weaken the US economy is a topic of ongoing debate among economists, and the answer depends on context, timing, and how the reduction is implemented.

Let’s break it down.

On one hand, proponents of lower government spending—often aligned with fiscal conservatives or libertarian views—argue that it can strengthen the economy by reducing inefficiency, lowering taxes, and boosting private sector activity. The logic goes like this: when the government spends less, it needs to collect less in taxes, leaving more money in the hands of individuals and businesses. This can encourage investment, entrepreneurship, and consumption, which drive economic growth. Historical examples like the post-World War II period are sometimes cited, where sharp cuts in federal spending (from wartime levels) coincided with a booming private economy—though that transition was unique due to pent-up demand and global reconstruction needs. Studies from groups like the Mercatus Center or economists like Milton Friedman often emphasize that government crowding-out effects—where public spending displaces private investment—can be reduced with less spending, potentially increasing efficiency.

On the flip side, critics—often Keynesian economists or progressive policymakers—argue that cutting government spending can weaken the economy, especially during downturns. They point to the role of government as a stabilizer: spending on infrastructure, social programs, or direct stimulus (like the 2020 CARES Act) can prop up demand when the private sector falters. The 2008 financial crisis is a case study— austerities in places like Europe (e.g., Greece) led to prolonged recessions, while US stimulus spending arguably sped recovery. Data from the Congressional Budget Office (CBO) often shows that government spending has a "multiplier effect," where $1 spent can generate $1.50 or more in economic activity, especially in a slump. Cut that, and you might shrink GDP, raise unemployment, and spook markets.

Reality’s messier than either camp admits. It depends on when and how spending is cut. Slash it during a recession, and you risk a downward spiral—look at the 1937 Roosevelt Recession, where premature budget balancing tanked a fragile recovery.

But trim fat during a boom—like, say, reducing redundant bureaucracy when unemployment is low—and it might free up resources without much pain. The US debt-to-GDP ratio hitting 123% in 2024 (per CBO estimates) also fuels the "strengthen" argument: unsustainable borrowing could eventually trigger higher interest rates or inflation, choking growth. Less spending might signal fiscal discipline, calming bond markets and keeping borrowing costs down.

No hard data proves either side universally right. The 1990s under Clinton saw spending restraint alongside growth, but global tech booms helped. Post-COVID cuts haven’t fully played out yet—GDP grew 2.8% in Q3 2024 despite some tapering, per BEA stats, but that’s tangled with Fed policy and private rebound. X posts I’ve scanned lately show a split: some cheer “gov waste kills jobs,” others warn “cuts gut the safety net.”


So, is it true? It can be, if timed right (strong economy, targeted cuts) and paired with tax relief or deregulation to juice the private sector. But it’s not a blanket truth—slash too deep, too fast, especially in a slump, and it could backfire. Evidence leans both way.



@Grok
 
Lower government spending will only strengthen the economy if it is accompanied by lowering taxes. If spending is reduced but taxes remain the same--say those going to reduced debt instead of being spent--then it is likely they won't have any real short-term effect on the economy.
 
Diogenes said:
Think so?
Click to expand...

Yes
Diogenes said:
Why do you say that?
Click to expand...
Because the net effect on the economy if you reduce government spending while keeping taxes where they currently are is you are putting less money back into the economy from government spending. If you are paying down the debt, in the long run that will improve things, but in the short run, the economy will suffer from that money going to debt payment instead of into the economy.

So, if you lower government spending, in the short term you need to also lower taxes to keep the amount of funds available in the economy the same.

The way to fix this dilemma is to lower government spending, lower taxes, and grow the economy in size. That way you have a greater tax intake due to greater economic output and that allows you to pay down debt that in turn reduces the burden and cost of government on the economy.

Think of it in terms of your personal income and spending.

If you reduce your spending and while having lots of debt to pay off and pay more of that off, in the short term you have no additional funds to spend on "stuff."

If on the other hand, you reduce spending and are paying more debt off but get a raise in pay then you can do that and end up with more funds to spend on "stuff."
 
T. A. Gardner said:
Yes

Because the net effect on the economy if you reduce government spending while keeping taxes where they currently are is you are putting less money back into the economy from government spending. If you are paying down the debt, in the long run that will improve things, but in the short run, the economy will suffer from that money going to debt payment instead of into the economy.

So, if you lower government spending, in the short term you need to also lower taxes to keep the amount of funds available in the economy the same.

The way to fix this dilemma is to lower government spending, lower taxes, and grow the economy in size. That way you have a greater tax intake due to greater economic output and that allows you to pay down debt that in turn reduces the burden and cost of government on the economy.

Think of it in terms of your personal income and spending.

If you reduce your spending and while having lots of debt to pay off and pay more of that off, in the short term you have no additional funds to spend on "stuff."

If on the other hand, you reduce spending and are paying more debt off but get a raise in pay then you can do that and end up with more funds to spend on "stuff."
Click to expand...


Good take. I can find no fault with that reasoning.

Do Democrats want to reduce taxes and spending?
 
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