The Economic Effects of Reducing the Costs of Government

A good deal of economists, analysts, and investors appear to believe that strong deficit reduction – either through increased taxes or budget savings through entitlement reform and federal workforce reduction – would correlate with prolonged below trend economic growth.

A recently released report by the Congressional Budget Office (CBO) came to the exact opposite conclusion.

Source: Congressional Budget Office

In it, the CBO projects that a $2 trillion increase in primary deficits – i.e. stimulus spending – initially increases overall economic growth.  The effect, though, quickly fades into a fiscal drag on the economy.

In contrast, the CBO looked at two...