What would be the consequences of balancing the federal budget NEXT year?

[Damuri_Ajashi]

@Sam_Stone

It would not be easy to cut spending that much, but it wouldn’t crater the economy.

Well, we wouldn’t be in mad max world but the world would probably seem very familiar to people from the great depression.

But that doesn’t mean the economy would contract by that much, because those cuts would free up capital and other resources that would be put to use elsewhere to some degree.

Free up what capital, the hypothetical assumed the same tax rate but now with more unemployed people and lower economic activity.

I’m guessing you’d see modest deflation, an unemployment rate spike to maybe 10-12%, and a lot of wailing and gnashing of teeth. Then the economy would re-adjust over time and recover, and probably be healthier than it otherwise would have been.

There are much less painful ways of getting there and frankly we wouldn’t see very much inflation in that sort of environment, more likely to see deflation.

The economy is pretty resilient to fiscal shocks.

You act as if the great depression never happened.

Government spending was cut almost in half in the year after WWII, and millions of people employed by the federal government were laid off, and the country did fine.

Depending on who you ask, it was either caused by all the war bonds maturing at about the same time combined with the stimulative effects of things like the GI bill and the wealth distribution effects of powerful labor unions OR it was caused by the employment effects of the military industrial complex.

On the other side of the coin, the 800 billion dollar stimulus was spent in two years, and you can hardly notice the effect in the statistics.

You’re looking at all the statistics. Rate of job loss reversed during taht period. erate of economic decline reversed in that period.

@Sam_Stone

If you lay people off, they become available for other jobs. Stop building things, and the price of the raw materials you would have consumed goes down. Stop borrowing a trillion dollars each year, and it takes pressure off the capital markets.

They would become avaialble for what jobs?

WTF are we building?

The capital markets are not being crowded out by treasuries. Treasuries are yielding next to nothing because people are seeking safety not returns. It is clear that people would rather bury their money in the backyard than invest in anything these days because noone wants risk right now.

In fact, the 1.2 trillion would not have to be handled as an across-the-board 30% cut. You could instead look at cuts to the heaviest hitters in the budget first, and some departments could be cut far more drastically or even eliminated.

Those heavy hitters you are talking about are natiaonal security, social security, medicare and medicaid right? The non-military discretionary budget amounts to 11% of the federal budget.

[HoneyBadgerDC]

I feel investing in a special goverment fraud squad could pay for itself many times over. I realize that supposedly we have this in place but it still is not happening. Every single entitlement program out here is rift with fraud as well as many of the goverment contracts handed out. I would not be surprised if all depts were straightened out 100% that we would not save a minimum of 40%. Not realistic I know.

[Voyager]

@Sam_Stone

I However, some people who would be laid off would find work in the private economy simply because their skills are in demand. NASA scientists and astronauts have been snapped up by private space companies. A good percentage of government accountants, lawyers, scientists, and engineers could probably find work. Even in an economy with high unemployment there are jobs going unfilled for lack of available talent.

Ravenman covered most of this pretty well, but I have to respond to this. First, such a cut in federal spending is not going to impact federal employees alone, just as cuts in state spending have led to weaker general conditions in the states. Decreased demand is going to drive down private employment, or at the least cause hiring freezes.
Second, even if astronauts get hired, we should be concerned with the mass of laid off workers, not the elite 1%.
Third, I’m trying to hire people with very specific skill requirements. I figure that there is a handful of people working for the government (in the national labs) who have the qualifications I need. Weak employment means that companies feel they can be very picky, demanding not just skills but exact matches. I have a headhunter friend who is seeing this. Plus, while we are having problems finding people now, four years ago it would have been easy. But of course back then hardly anyone in Silicon Valley was hiring. Maybe you have it better up in the boonies.
In case you weren’t aware, there is a lawyer glut today. Lots of scientists work on NSF grants - cutting those will cut the need for scientists (besides other ill effects.)
Things would be a big mess, with lots more underemployment than we even see today.

[Voyager]

@badger5149

I feel investing in a special goverment fraud squad could pay for itself many times over. I realize that supposedly we have this in place but it still is not happening. Every single entitlement program out here is rift with fraud as well as many of the goverment contracts handed out. I would not be surprised if all depts were straightened out 100% that we would not save a minimum of 40%. Not realistic I know.

May I introduce you to the GSA Office of Investigations?