Keynesians believe government spending cuts hurt the economy. Hence the arguments against “austerity” measures. (As an aside, one wonders what those who lived through the Great Depression and World War II think about today’s so-called austerity plans.)
Kevin Hassett of the American Enterprise Institute put the Keynesians’ argument to the test (as documented by the Heritage Foundation’s “Insider Online“) and came up with the following graph.
“The green regression line highlights the most important takeaway from this chart: that there is no obvious relationship between a decrease in government spending and a decrease in GDP. Keynesians would expect the line to slope upward; in fact, it slopes slightly downward. But the slope of the line is not significantly different from zero […] .
“The chart has two policy implications. First, austerity has not caused even near-term harm to countries that have undertaken it. Second, austerity is something of a free lunch. This is because, as studies (such as a 2010 paper by economists Andreas Bergh and Martin Karlsson) show, longer-run growth is higher in countries with smaller governments. Nations that reduce spending today can do so without fearing that the longer-run growth is being purchased with a costly near-term recession.”