Solarbird (solarbird) wrote,

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Debtordammerung, Part II: Why No Cuts?

So the first question, of course, is why hasn't the GOP actually cut government size before? Not "reduced growth of," but actually cut? For reals? They've had power for reals; why haven't they done it?

The answer is very simple: because every actual spending cut slices off from headline Gross Domestic Product (GDP). GDP, at the topmost level, is a pretty simple formula:

GDP = C + I + G + (EX-IM), which is to say:
GDP = private Consumption + gross Investment + Government spending + (EXports − IMports)

Let's fill in a couple of numbers, shall we? 2010:
US$14.7T = C + I + US$3.46T + (EX-IM)
Of that US$3.46T, 1.29T was deficit spending. In other words, borrowing. New debt.

What if, all else equal, that budget had been balanced entirely through spending cuts from the prior year? What's that to do GDP numbers? Not actual economic activity, let's pretend that's isolatable; just the raw numbers of balancing the budget that year, and doing it through cuts alone:
Revised GDP=US$14.7T-1.29T=US$13.41T.
Percentage of original: US$13.41T/US$14.7T = 13.41/14.7=0.912244898
91.2% of original GDP.
An 8.8% drop in reported GDP for 2010, that's what. That's gotta smart. And far more importantly, for political purposes:

Recovery? What recovery? 2009's last-estimate GDP was US$14.25T; you'd be looking at a headline GDP decline of 5.9%, year-to-year. And that ignores secondary effects - follow-on economic activity from that borrowing would also be lost, dragging actual economic activity down as well - but calculating how much would take days, so we'll just stick to "-8.8% same year, -5.9% year-over-year."

There are very, very few politicians who want to run against that ad, good times or bad, and that's why government doesn't get cut, ever. It's hard enough to slow growth down.

(I am, for the record, a balanced budget hawk. This is in no way an argument against a balanced budget; but I am not a cuts-alone supporter. Cuts-alone gets into the freaky intersection of fundamentalist religion and conservative economics for you to think that shit works here. But I digress.)

If the borrowing limit were not raised by August 2nd, and somehow remained static throughout the rest of the year, you'd have a similar event happen in the numbers for 2011 as to the hypothetical example above in 2010. Since we don't have numbers that mean anything here, I'm not going to calculate the actual 2011 numbers, but you'd have the effect in at least two stages; one in 2011, one in 2012, since we're midway through 2011 and a lot of borrowing already happened.

And that's why the GOP never cut the actual size of government: they didn't want to face these numbers. The Tea Party - the smarter parts of it, anyway - have finally figured that out. Some of them (c.f. Karl Denninger) are right up front about this and have in fact spent a lot of time saying this will hurt, and throwing around the GDP formula I show above. But they believe it's necessary. The rank-and-file? Honestly, I don't even know. But whatever they think will happen, they're pushing for this particular trigger to be pulled.

What happens if they get it? We'll talk more in Part III.
Tags: economics, politics, writings

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