Tea party austerity plan: Would slashing US spending work?

Can America cut its way to prosperity by reducing government spending by hundreds of billions of dollars – starting now and for each year to come for 10 years?

That's the assertion of tea party conservatives and fiscal hawks in Congress, whose economic plan would reduce government spending by a collective $2.5 trillion within a decade. Most nondefense government spending would get cut by 40 percent, and the share of the gross domestic product attributed to government would drop from 25 percent to 18 percent. The eventual benefit, supporters of the plan say, would be a reinvigorated private sector.

Contrast that with President Obama's competing vision for a renewed economy. His economic fix, as outlined Tuesday in the State of the Union address, is to invest in the education and energy sectors, hold the line for five years on so-called discretionary spending – which has jumped 84 percent in the past two years – and slash corporate tax rates, a strategy that helped kick-start the economy in the 1960s and mid-1980s. He offered a relatively modest $400 billion in spending cuts over five years (not including cuts in defense).

RELATED: Tea party Top 10 winners and losers

The idea that American prosperity depends on shrinking the size and spending of "big government" is hardly new. It was an often-espoused tenet of President Ronald Reagan (under whose administration government spending actually grew, as did the economy). Now that it is finding reborn preeminence in the tea party fold – and in Congress – the approach is being reexamined by economists, journalists, lawmakers, and sundry number-crunchers. Their verdict on how well it would work?

That depends on what the ultimate goal is, and whom you ask.

To fiscal hawk Rep. Paul Ryan, who gave the Republican response to the State of the Union on Tuesday, the nearly $2 trillion in US spending to stimulate the economy yielded only a weak recovery and added to the national debt. Moreover, he and many tea party activists say, taxation, debt, and regulation – including the new health-care reform law – create uncertainties in the investment markets that inhibit investment and private-sector job creation.

"It's no coincidence that trust in government is at an all-time low when the size of government is at an all-time high," Mr. Ryan, who chairs the House Budget Committee, said Tuesday. The Republican Study Committee plan to chop $2.5 trillion off of federal spending "is not just about programs of government, but purpose of government," he said.

The plan calls for across-the-board cuts, dialing back agency spending to 2008 levels for this fiscal year, and 2006 levels after that. It also would end government subsidies for the Corporation for Public Broadcasting and Amtrak, among many others.

Many economists suggest that America's fragile recovery will be jeopardized by self-imposed "austerity economics" such as those proposed by the Republican Study Committee. The government cuts would cause layoffs in the public sector and among some private contractors, and would remove from the economy an important buttress, they say.

"The idea [of debt reduction] has merit, but I also think it's myopic and kind of juvenile to just pick a level that you were comfortable with before and go back to that level," says Emory University economist Thomas Smith. "The idea isn't to have crazy spending, but what's the appropriate amount of spending, and it probably isn't 'slash everything.' The idea that if we remove government from GDP that void will be filled by businesses automatically because government is somehow boxing out business spending by being a big government, the mathematics there are not that simple."

Business people and voters understand that government stabilizers are needed, especially during crises, he adds, and people's view of government is more subtle than Republicans acknowledge.

Framers of the Republican Study Committee plan see theirs as less a short-term job strategy and more about rebuilding the economy for long-term growth. The undergirding argument – that a leaner, less intrusive, and easier to predict central government is better for private investment, and thus for workers – is one that economist Allan Meltzer of Carnegie Mellon University supports.

This plan "affects people's expectations about the future, perhaps not immediately, but because you in essence tell them, 'Look, we're going to take some of these low-productivity uses the government has for the money and we're going to convert it into investment,' " says Mr. Meltzer. " 'And we're not going to tax you in the future in order to pay for low-productivity programs, because there aren't going to be as many.' Cutting the budget is not the answer, cutting spending is the answer, because if you cut the budget and leave spending unchanged people will know they're going to have to in the future pay taxes to support that spending."

Republicans who back the study committee plan have so far downplayed the potential job losses that a 40 percent across-the-board spending cut would produce, or how that would play politically. "Everything on this list [of spending cuts] pales in importance to saving the country," Rep. John Campbell (R) of California, who was endorsed by several national tea party groups in the last election, told Slate's Dave Weigel.

Mr. Obama, too, acknowledged in his address the looming budget negotiations that Meltzer says will test US leadership on all levels.

"[Obama] is putting out a package which he knows he isn't going to get through the House, and the Republicans are putting out their package knowing they're not going to get everything they ask for," he says. "Leadership consists of doing the things that people may not be convinced will be good for them ... until they see that those things are good for them. Paul Ryan understands ... that people are not going to like many of the cuts that he proposes, but he understands also that they have to be made."

RELATED: Tea party Top 10 winners and losers