Government spending cuts could cause growth only if they increase the other components by more than spending was cut. There's a common argument that this could happen in the long term. Less federal spending allows the government to take in fewer tax dollars. If you believe that the private sector better promotes economic growth than the government, then it makes sense that smaller government paired with lower taxes will lead to higher growth.

But that's not the situation we're talking about here. We're trying to pay down the enormous government debt, so we can't lower taxes in proportion to the spending cuts. Doing so would leave the debt level unchanged. In order for spending cuts in a vacuum to stimulate the economy, they must have some intangible positive effect on one or more of the other components of GDP. Let's think through this.

Consumption : Less government spending will not provide consumers with more money to spend. So to spend more, they would need to save less or incur more personal debt. These options seem somewhat unlikely, as less government spending probably means the impact of entitlements softens -- so Americans will need to save more, not less.*

: Less government spending will not provide consumers with more money to spend. So to spend more, they would need to save less or incur more personal debt. These options seem somewhat unlikely, as less government spending probably means the impact of entitlements softens -- so Americans will need to save more, not less.* Investment : Less government spending will not provide firms with more money to invest. So they would either need to pay shareholders less or borrow to invest more of their revenue for growth. It's hard to see why cutting government spending would encourage either of these options. At best, you could see the private sector attempt to provide some of the services that government cut, but most of the government's functions tend not to be potential profit centers for firms. More importantly, this would just replace the services the government already provided, so growth would remain flat. Economic activity would remain unchanged: some would just shift from government to firms.

: Less government spending will not provide firms with more money to invest. So they would either need to pay shareholders less or borrow to invest more of their revenue for growth. It's hard to see why cutting government spending would encourage either of these options. At best, you could see the private sector attempt to provide some of the services that government cut, but most of the government's functions tend not to be potential profit centers for firms. More importantly, this would just replace the services the government already provided, so growth would remain flat. Economic activity would remain unchanged: some would just shift from government to firms. Net Exports: Less government spending could actually reduce net exports. If the deficit declines, then the dollar should strengthen. While that might sound great, it means that our goods and services will appear more expensive to those overseas. That will make it more difficult to convince them to buy U.S. exports.

You can quibble that government spending shouldn't be a part of the definition of GDP. That position isn't crazy, but it also doesn't change anything. As just shown, those other components will not reflect new economic activity boosting growth if government spending is cut.



Remember, cutting spending takes money out of the economy. That money isn't being replaced. Any further growth will have to occur by draining savings or by taking on more credit. Will less government produce stronger economic sentiment to induce such behavior? It could if the government borrowing was having an adverse negative effect on the economy in some way. Currently, that doesn't appear to be the case. U.S. debt is still being issued relatively cheaply.