Politicians often assume, based on crude macroeconomics, that increasing government spending will make the economy grow more. But in fact, government spending often crowds out productive private investment, and deficit spending drives up interest rates, making it more difficult for people to obtain credit needed to invest in the economy.
As economist Romina Boccia explains:
Economic research shows that stabilizing government debt by cutting spending can unleash economic growth. Today, the federal government’s public debt is a staggering $28.8 trillion—equivalent to the nation’s annual economic output—and is projected to skyrocket to 166 percent of GDP by 2054 under optimistic assumptions….High debt levels are already slowing economic growth, driving up inflation, and pushing interest rates higher. This makes it harder for families and businesses to borrow and invest.
Take the crowding-out effect. When the federal government borrows heavily, it competes with the private sector for limited financial resources, driving up interest rates. Between January 2022 and January 2025, for example, the prime bank loan rate doubled from 3.25 percent to 7.5 percent. As loans become more expensive, startups delay expansions, businesses scale back hiring, and innovation suffers. As one business owner noted in 2024, “We are a new business and our loans closed when the rates were at an all-time high … so that has increased our monthly expenses dramatically.”
The result is a less productive economy, lower wages, and reduced competitiveness. Cutting spending reduces this crowding-out effect by freeing up resources for private-sector investment, creating jobs, and boosting incomes.
Economic research reinforces the idea that spending cuts can enhance growth. A 2020 study by researchers at the Hoover Institution found that stabilizing and reducing the debt by restraining the growth in federal spending could boost short-run annual GDP growth by 10 percent and long-run growth by 7 percent….Additionally, the Congressional Budget Office (CBO) projects that stabilizing the debt could raise projected income per person by $513 in 2030 compared to baseline projections. The gain in annual income grows significantly over time, and by 2054, the average American’s income could be $5,500 higher (see the graph below).
To keep government spending from devouring ever more of our economy, the U.S. government will need to get rid of welfare and waste, and also trim entitlements. The federal government should stop spending billions of dollars on giveaways to trial lawyers and left-wing interest groups in collusive lawsuits. It should stop spending hundreds of billions of dollars on student-loan bailouts, subsidies to predatory academic programs and wasteful colleges that jack up tuition to collect more federal cash, and low-quality colleges whose students are so dumb that few ever graduate. It should stop spending billions on illegal aliens and failed job-training programs that teach bad work habits and do nothing to increase employment. It should stop spending money on ineffective programs like Head Start and cut billions of dollars in wasteful Pentagon spending.
The federal government should stop spending billions of dollars for “high-speed” rail that isn’t really high-speed and will carry few riders, resulting in more pollution per rider than cheaper modes of transportation. “High-speed” rail can’t “compete with air travel in terms of time or price,” notes the Las Vegas Review-Journal. California’s high-speed rail system will cost at least $100 billion more than originally estimated. Reason Magazine notes that even if California’s “high-speed” rail system is ever built, it “will have ticket prices higher than airfares and will take nearly twice as long as flying.” The rail project will also harm the environment. The Review Journal calls it an “environmental nightmare.” As the Daily Wire notes, “During the project’s more than 10-year life so far, it has been sued multiple times by environmentalists for harming wildlife along the proposed route.” Cars and buses use less energy per passenger-mile than the little-used trains will, and building the rail line results in greenhouse gas emissions. Operating high-speed rail will “take massive amounts of electricity,” “raising questions about the power grid’s ability to meet the demand,” says the Fresno Bee. “High-speed trains require huge amounts of infrastructure” compared to a “four-lane freeway,” says a transportation expert.
But all the cuts described above won’t be enough — such programs comprise only a small fraction of the federal budget. To get America’s massive budget deficits under control, entitlement spending will have to be cut, too, such as spending on Medicare and Medicaid, which are consuming an ever-increasing fraction of the federal budget. Medicare and Medicaid cost more than all federal education and transportation spending and all spending on illegal aliens combined.
Government spending cuts are perfectly compatible with a growing economy. As the American Enterprise Institute’s James Pethokoukis pointed out a decade ago, “From 1944 to 1948, Uncle Sam cut spending by a whopping 75% as World War II came to end. Spending as a share of GDP plunged to 9% in 1948 from 44% in 1944.” “Despite cuts which dwarfed those” that “Republicans are calling for” today, “the U.S. economy thrived. There was no mass unemployment despite rapid demobilization of the armed forces.” Similarly, the economy grew in the 1990s, when federal spending was much lower than it is today: “After the Cold War ended, overall federal spending fell to 18% of GDP in 2000 from 22% in 1991. But again the economy boomed. Real U.S. GDP grew by 40% with an average annual growth rate of 3.8%.”
Government spending seldom prevents or cures recessions. Herbert Hoover increased government spending in the Great Depression, both in real terms and as a percentage of the economy, but the economy failed to revive during his presidency. As Megan McArdle of The Atlantic pointed out, government spending more than doubled as a percentage of the economy from 1929 to 1933. Although the economy revived in Franklin Roosevelt’s first term, it then went back into a nasty recession in 1937-38, the so-called Roosevelt Recession (a recession aggravated by 5-to-4 Supreme Court ruling strengthening unions and thus sparking a wave of costly strikes). A sustained recovery from the Great Depression occurred only after a coalition of conservative Democrats and Republicans effectively took control of Congress in 1938 and blocked (or in one case, repealed) various anti-business measures that had been stalling a natural recovery by discouraging private investment.
To cut America’s massive budget deficit, we also need to get rid of tax loopholes, raise top marginal tax rates on ordinary income by several percent, and get rid of tax credits that disincentivize work or marriage.
