Yes, Macroeconomics 101 is Correct

“Some Simple Deficit Reduction Arithmetic”:

Kash Mansori notes that it takes more than a $100 cut in government spending to cut the deficit by $100. The reason is fairly simple. A cut in government spending causes output and income to fall, and the resulting fall in tax revenue increases the deficit offsetting some of the gain from the cut in spending…

When the policies they want to pursue have large negative effect on the deficit, the economy, employment etc. Republicans invent a story where the pain goes away. Somehow, the deficit actually falls, output goes up, and employment is stimulated even if it runs counter to obvious intuition. When tax cuts are the goal, we are told that tax cuts lead to so much additional effort that revenues actually go up and this reduces the deficit. We can cut taxes, and reduce the deficit! This magical answer is, of course, nonsense, but Republicans were able to hoodwink quite a few people into believing this.

(Via Economist’s View (Mark Thoma).)

Read Mansori’s entire article.  It’s worth it.  A few nuggets:

Somehow, this simple exercise in macroeconomic math seems beyond the reach of policymakers around the world.

  • Many Republicans (and some Democrats) in Washington continue to believe that they can close a $1 trillion deficit by simply cutting $1 trillion in spending, and are apparently hoping to use the debt ceiling vote to do exactly that.
  • The Cameron government in the UK embarked on an austerity program last year to try to reduce its budget deficit, and now mysteriously keeps missing its deficit reduction targets as the UK economy shrinks.
  • The Greek government was forced into enacting a number of austerity measures last year, and… surprise, surprise… is now missing its deficit targets.

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