Ah yes but you see, all that government spending was just waste. So in the mind of the administration (or at least their public statements) they have miraculously achieved the second case.
Not necessarily. Hypothetically speaking, if the federal government becomes more efficient, i.e., it produces the same services for less money, the FED could stimulate the economy with low interest rates, so that the private market employs the people released from the federal government and we will have higher production and higher GDP.
Practically, speaking if you just fire a bunch of federal employees and close departments randomly, you are not making the government more efficient you are just making it less productive. Then if, at the same time, you put in a bunch of sudden arbitrary tariffs that cause inflation across the board, then you tie the hands of the FED and the FED cannot lower rates to preserve employment. So in that case, yes GDP will decrease.
In the short term, yes. Long-term, no (it would have the opposite effect). Productivity gains accrue compounded over time, spending cuts show up immediately.
Government spending is included as part of GDP, so a 20% reduction in spending would have an immediate effect on this number.
That's why a lot of economists think GDP is a bad metric, since a debt-fueled spending spree (like the US government loves to do) shows up as GDP growth which makes it hard to compare GDP numbers since nobody ever adjusts for debt-to-GDP ratios.
If you look at this chart, you can see what I'm talking about. For the sake of argument let's say both Sweden and the UK had the same GDP growth rates and similar levels of government spending. Sweden would be the more productive economy because they'd be doing that with far less debt: https://en.wikipedia.org/wiki/Debt-to-GDP_ratio#/media/File:...
A debt fueled spending spree by private enterprises boosts GDP too, for the same reason. That’s kind of the point of the number that measures spending sprees (and the other various kinds of spending).
The degree to which it’s a “good thing” or not is another question. The assumption that either party is automatically productive or wasteful is obviously incorrect. Governments can burn money or invent the internet and private industry can build jet engines or tamagotchis.
If GDP is growing equally fast in both countries but with dramatically different levels of indebtedness, you can unequivocally claim one is more productive than the other at present.
Sure, either country might invent the next AI in the future.
But if we're assuming debt-fueled government investment is what results in this future growth (big assumption), then the less indebted competitor still has the capacity to take on all the debt they aren't shouldering at present to grow even faster.
> If GDP is growing equally fast in both countries but with dramatically different levels of indebtedness, you can unequivocally claim one is more productive than the other at present.
It's funny that this question isn't answered anywhere in the news!
The question is a bit vague, let's split it up into different options:
1. The government does exactly the same work as it does today, but with 20% fewer employees. The US spends $270B on civilian employees. So 20% of that is $54B. US GDP is 27.72T. 54B is totally irrelevant.
2. The government spends 20% less on everything it can. Most of what the government spends on cannot be cut, it's fixed. Social security, medicare, defense, healthcare, veterans benefits, interest in existing loans, etc. https://fiscaldata.treasury.gov/americas-finance-guide/feder... If you take away the parts that cannot be cut, you're left with discretionary spending. https://usafacts.org/articles/how-much-of-the-federal-budget... That's about $300B (because we need to leave out defense and things like veteran's benefits and income security which are discretionary but must be paid). What remains is education, parks, research, etc. If we cut 20% of that about $300B which is left over, we're still talking $60B.
So no, a magically 20% more efficient federal government won't do anything to GDP, because it won't do anything for government spending. Pretty much all government spending is in direct payments to help people and in defense. That's why DOGE and others cannot possibly make any difference at the large scale, they can only hurt people while providing nothing meaningful to the country.
Definitely, no. After Laffer, in normal open market, all government spending (equal to sum of all taxes), should be less than 30% (less then optimum, so will have gap for emergency cases).
Why it is more effective to limit taxes, because by definition, private business is most effective form of production, and gov't entities are least effective form, and with tiny taxes people will have more money to reinvest into economy grow (via investments into existing and new private businesses), which is definitely more effective than spend money by government or just use government to redistribute money to people.
So in ideal case, fed gov should be zero size, and only in extreme cases appear and save world, then immediately disappear and return zero taxes.
PS what's also funny, usually money redistribution bureaucracy spend more money to their functioning than distribute to people, even in cases of very large systems with millions participants.
PPS yes, exist number of cases, where concentrated spending via government is beneficial, because of size factor. But problem is, many of such cases are only seen post factum, and it is not easy to predict, if something is such big thing.
Examples of cases benefit from fed size, are: railway from west to east on early 20th century; nuclear power ~80 years ago; space scale rockets in 1960s.
- Now all these cases will be more effective handled at private business.
For now we have perspective cases of AI and quantum computers, but at the moment we don't know, which approaches will deliver value and which will just gather low hanging fruits.
PPPS must admit, army/navy (including veterans care) and weapons industry are special cases, which need concentrated money to effectively function, and unfortunately they typically cannot be optimized, because already working underfunded.
Why need finance own army - to not finance enemy army.
In ideal case, own army must be only tiny bit more powerful than enemy army, and this will be enough to save from war.
> After Laffer, in normal open market, all government spending (equal to sum of all taxes), should be less than 30% (less then optimum, so will have gap for emergency cases).
Please explain, what exactly you don't understand from my comment?
- I have included source where you could find additional info, but sure I have not included huge number of other sources, because they are well known for people really interested in economy, and sure I will add some others if somebody ask.
The Wikipedia article you linked to doesn't support the assertion that Government spending should be less that 30%
And in-facts disputes the claim that lowering US tax rates would actually increase the tax take
We actually have the evidence to back this up as the deficit grew when Trump cut rates
> Why it is more effective to limit taxes, because by definition, private business is most effective form of production, and gov't entities are least effective form
This is also an unproven assertion as there are plenty of examples effective public spending and ineffective private production
> effective public spending
> ineffective private production
You really thinking, if private company will be ineffective on concurrent market it will survive significant long time?
And you also thinking, exist some superhero, who always stopping ineffective public spending?
I think, you just manipulate, showing rare cases as typical practice.
And yes, I agree, could be exceptions, but I said about typical cases, because we cannot lean country on rare things. Country should have concrete reliable foundations.
Is government spending crowding out private investment? (Is the private sector competing with the government for employees?). If so then GDP should increase
Is unemployment high? Then probably it would hurt GDP, but that depends on interest rates. If interest rates are very low, then there's very little cost to having excess employees being paid by the government: indeed presumably you can find something else useful for them to do. If interest rates are high, then the government is paying a heavy rate to subsidize these now-redundant employees. That's stagflation, which is essentially economic hard mode.
For example, what a waste it was during the Great Recession, when interest rates were basically zero, to have people unemployed instead of doing something useful, like maintaining or upgrading infrastructure. Alas!
I don't know. If we had a time machine, we could go back to the 1950s and defund government-sponsored education and research programs instead of increasing spending on them, and see how things turn out, GDP-wise.
Trouble is, that could easily do enough damage to prevent the invention of our time machine in the far future, or at least seriously delay it. Maybe not such a good experiment after all.
