POLITICAL CALCULATIONS: In Which We Explain How Cuts in R&D Spending Can Affect GDP to President Obama.

To understand why spending cuts like those of the sequester are considered to be so much less harmful to the economy than increasing taxes, let’s consider the real nature of government spending and taxes.

Here, when government raises taxes to support its discretionary spending, what it is doing is hurting a lot of people a little to benefit just a handful of politically-connected people, who just coincidentally happen to benefit a lot from government contracts (wink-wink). Because the harm is so widespread and the benefit limited to so few, the general economy suffers quite a bit as a result. Those effects are worse when the threat of additional tax increases remain after tax rate hikes are implemented.

But when a government cuts its spending, those dynamics work in reverse. Instead of lots of people being harmed a little, only a handful of people are. And since those people are significantly less likely to be engaged in sustainable economic activity in the first place, the economy at large is barely affected when their access to taxpayer money to fund their business income is reduced.

And that, in a nutshell, is why spending cuts are better for the economy than tax hikes for balancing a government’s budget.

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