And yet that’s not the order of operations in government spending. The government spends first and collects taxes and sells bonds after to offset spending, but set that aside for a sec, let’s look at the numbers.
I would agree that it’s possible to have increases in GDP when the government is cutting spending, my comment should have been, “all other things being equal if the government cuts spending GDP will decline.”
So first here is GDP from 1995-2005:
In each year between 1998-2001 when the government cut spending relative to taxes.
Here’s the surplus’ during those years:
So it’s my claim that when the government cuts spending (relative to taxes) it results in a net loss of spending to the private sector. However, there is a caveat. The private sector can create money via the banking system.
So we look to see how much people increased their borrowing and decreased their savings over the same period:
Here we see debt growth total across all sectors and in the private sector (highlighted in yellow) as a percent. I included a few years before and after for a little context…
And here are the real numbers:
Again totals across the economy in the first row and private sector in the second row highlighted in yellow.
When the government reduces spending aggregate demand will fall unless the private sector responds by increasing its debt.
There’s one more factor.
There’s also private sector savings…
But that also supports my conclusion as well…
As you can see, in response to the governments decrease in spending (again relative to taxes) the private sector consistently dipped into it’s savings from 1998-2000.
So while GDP increases during this period it take’s it toll by increasing private sector indebtedness and decreasing private sector savings.
Either way, cutting government spending decreases aggregate demand. Even if you’re right and the government is borrowing money from savers, the effect is still the same. Savings is money that isn’t circulating. If the government sells a savings account and then spends it, it’s doing something with that money that wouldn’t be happening if it ended up in a mutual fund or a savings account.
The source on the screenshots is HERE
Find a year since 1974 (when fiat was fully adopted) that what I’ve said is not the case.