The "government" and the economy

I am incredulous about the quote from Sen. John Cornyn in yesterday's Post, in the article, "Economy shrinks as federal spending cuts trump private sector’s growth," about negative economic growth in the last quarter of 2012.

But Sen. John Cornyn (Tex.), the No. 2 Republican in the Senate, called the idea that economic growth relies on government spending “a Keynesian pipe dream.” The best thing Washington can do for the economy is to rein in the deficit, GOP leaders said.

The first reality is how much of the US economy is dependent on military spending. Military contractors have been in stasis out of concern that the "fiscal cliff" will be reached triggering sequestership and large cutbacks in military spending ("Joint Chiefs warn Congress that looming defense cuts would 'hollow' military" and "Contractors not fretting as sequestration threat looms" from the Post).

The second has to do with the impact of federal policy on the financial system, and how lack of predictability and stability (way more significantly than the current level of deficit spending) and stability.

Third, droughts and storms couldn't have helped the economy that much either.

Not to mention the ongoing downsizing of local governments. People out of work don't spend money. Etc.

Anyway, how's austerity policy working out for the UK? Also see "America’s fiscal policy is not in crisis: The urgent challenge is to promote economic recovery" from the Financial Times.

From the article:

The US confronts huge challenges, at home and abroad. Its fiscal position is not one of them. This is a highly controversial statement. If one judged by the debate in Washington, one would conclude that the federal government is close to bankruptcy. This view is false. Yes, the US does confront fiscal challenges in the long term. But these are largely caused by the soaring costs of its inefficient healthcare. Yes, the US is engaged in a fierce debate on fiscal policy. But this is due to philosophical disputes over the role of the state. Yes, the US has been running large fiscal deficits in the short run. But these are a result of the financial crisis. ...

This brings us to the philosophical dispute. One side of the political debate is strongly committed to the idea that taxes should fall. Some in this camp argue that all taxation is theft. Others believe taxes destroy incentives. Yet others argue that any state support saps self-reliance. Meanwhile, those on the other side of the debate believe, as strongly, in a safety net that covers risks related to health, ageing and unemployment. President Barack Obama defended this position, to my mind persuasively, in his inaugural speech. ...

In practice, political equilibrium tends to include the commitments to spending, but not the parallel commitments to revenue. In the long run, adjustments must be made. ...

The federal government is not on the verge of bankruptcy. If anything, the tightening has been too much and too fast. The fiscal position is also not the most urgent economic challenge. It is far more important to promote recovery. The challenges in the longer term are to raise revenue while curbing the cost of health. Meanwhile, people, just calm down.

Calm? I wish.