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Economists seem to agree that it's best for the government to reduce expenses while the economy is in good shape and increase expenses when it's in trouble. However during the last recession most countries (with the major exception of the US) haven't decided to increase public spending to help the economy. Likewise I don't see many governments trying to save money and reduce deficit during the current upwards spiral.

Why aren't governments following this very basic economic advice? Is this reluctance simply due to pressure from the voters? Or is the rule not as effective as claimed by many economists?

JonathanReez
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    For the record, the United States implemented a substantial (and effective) spending package to combat the effects of the recession, the ARRA. – Publius Oct 12 '16 at 04:55
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    This is really broad and missing specificity to make it answerable. Every country has different reasons for doing different things, and as Avi points out, there were countries that did exactly what you say they didn't. But to answer the question: because governments, like they people they are made up of, aren't perfect. –  Oct 12 '16 at 04:59
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    @Avi but the US isn't trying to save money now that the economy is good, which misses half the equation. Now would be a great time to reduce government deficit, but this isn't happening. – JonathanReez Oct 12 '16 at 05:28
  • @Avi question updated – JonathanReez Oct 12 '16 at 05:34
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    Solving future crisis doesn't help to winning elections now. – SJuan76 Oct 12 '16 at 10:28
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    Perhaps highlight the American left to be more specific. They advocated spending in the recession, but don't seem to suddenly be deficit hawks now that the US is no longer in a recession. Do they not believe in Keynsean economics and just always want more government spending? – lazarusL Oct 12 '16 at 14:56
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    @lazarusL you could say the same about the right, of course. It's just an argument of what to spend on. –  Oct 12 '16 at 18:01
  • The governed hate it when the government doesn't spend money, but at least a crisis is a good excuse to placate this sentiment. – Superbest Oct 13 '16 at 15:16
  • Note that economists agree that reducing the deficit when things are good is a good idea but that does not necessarily mean a balanced budget or a budgetary surplus. Now if we are talking about the EU, things are not as bad as a few years ago but it's not obvious that they are really good yet or as good as they ought to be to make the case that now is the time to tighten spending. And, as a matter of a fact budget deficits have been shrinking fast over the last 4-5 years. – Relaxed Oct 14 '16 at 19:01
  • Or are you really asking about the debt rather than the deficit? – Relaxed Oct 14 '16 at 19:02
  • @Relaxed I'm asking about deficit. Why debt is not a problem for many economies has been discussed here before. – JonathanReez Oct 14 '16 at 19:53
  • @JonathanReez Well, then, the answer is that deficit has decreased just about anywhere, quite substantially (although both the increase and the subsequent decrease arguably owe more to the effect of growth and unemployment on the tax base than to any deliberate counter-cyclical policy so it still makes sense to ask why governments don't do that). – Relaxed Oct 14 '16 at 22:11
  • @SJuan76 - that was the winniest comment of the week. – user4012 Oct 14 '16 at 23:18
  • @Relaxed good point about whether or not we're currently 'out of the crisis'. I don't remember many talks about cutting the budget back in 2007, but that was a long time ago – JonathanReez Oct 15 '16 at 20:37
  • @JonathanReez You don't necessarily need to deliberately cut anything, simply not spending too much (additional) money is enough to have a low deficit in good times. That's also the way deficits have shrunk in the last 5 years, when things are better, even moderately, tax revenue increases and money spent on some welfare programs also decreases “organically”. – Relaxed Oct 15 '16 at 20:43
  • @Relaxed The way I understood the theory, the government is also supposed to 'save' money (e.g. Norway's national fund) and then spend it during the bad times. That's what's currently keeping Russia on float despite the collapse of the oil prices. But I might have the theory wrong. – JonathanReez Oct 15 '16 at 20:46
  • @JonathanReez No, not necessarily, some economists do recommend that… but saving money goes above and beyond reducing the deficit and is equivalent to reducing (net) debt, hence my comment above. And if you consider debt relative to the GDP, you can even achieve that with a small deficit, albeit more slowly! Note that Norway and Russia are very specific examples, as a big part of their wealth comes from natural resources, which is known to create many problems for an economy (cf. Dutch disease, etc.). – Relaxed Oct 15 '16 at 21:07
  • @lazarusL - They are certainly more deficit hawks than the alternative. I consistently see "the left" advocating increasing revenue intake to try and cover spending needs. Historically, spending is not out of line with norms, in terms of GDP %. Historically, tax rates are at very, very low levels. – PoloHoleSet Oct 31 '17 at 15:41

3 Answers3

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There is some debate about whether it's a good rule in the first place but there is a number of reasons why governments don't do this:

Because they don't have to.

Governments have in their taxpayers a captive audience that always has to pay; limited only by their willingness to pay. So as long as the population is not too upset by the tax burden and the level of spending, they will continue to spend a lot. Why?

Because they don't want to.

Spending money is a lot of fun and brings you many friends! More importantly, it helps governments to be seen as 'doing something', creating jobs, saving puppies, fixing infrastructure, putting their name on things, preventing <insert great evils>.

There is an unlimited amount of good things a government could do if only it had enough money. Also...

Because it's really hard.

Besides popular perceptions, governments are under pressure by well-organized lobbying groups that want something and will finance the opposition if they don't get their piece of the cake. Cutting back on expenses is highly unpopular and a government that doesn't do enough about things will lose popular support. Those that promise more stuff are likely to become popular in their place.

Because there are no good times.

Times are never good enough to stop spending. Even if one crisis is over, there is always unemployment, wars on <something>, environment, energy, potential alien invasions, etc.

For a politician, the best place to be is in a crisis seen to be doing something, or at least criticizing those that are not doing something. It doesn't matter whether the crisis is real or not.

Why don't governments spend more during a crisis?

Option 1: because there is an opposite rule that suggests government should seriously cut back on spending when they have a lot of debt, to ease the burden and allow the private sector to recover

Option 2: because the austerity programs are mostly a sham with token reductions in spending but overall same or more money spent

Option 3: because the governments are already close to the limit of what they can spend

Option 4: because in order to borrow more or to get things working they actually have to reform

Option 5: because they are 'doing something' in the other direction of less spending or are playing politics with it (the evil IMF/EU/banks are forcing us spend less so we have to cut back on your favorite programs!)

Any one or more of these could be true.

user985366
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Peter S.
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  • But then... why aren't governments increasing spending whenever a crisis begins? We've been seeing a lot of 'austerity' programs here in Europe during the economic crisis, which didn't make much sense to me. – JonathanReez Oct 13 '16 at 09:38
  • Added more answers as to why that may be. – Peter S. Oct 13 '16 at 10:00
  • "Because there are no good times" That's not true. Stock market booms generally, and specifically 2001 was a pretty good time in recent history. – Superbest Oct 13 '16 at 15:18
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    That was a bit of dramatization - what it says in that section is that governments like to have a crisis they can use to justify higher spending with. And even if times are pretty good, they can just make a crisis up. – Peter S. Oct 13 '16 at 15:43
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    @Superbest Even in good times the opposition will do their best to paint them as bad, so in a sense even in the midst of a stock market boom it is still a 'bad time' for somebody. –  Oct 13 '16 at 20:17
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Unless you have a particularly civically-educated society, there would be no benefit.

If times are good, and you either raise taxes or don't cut taxes and accumulate a rainy day fund or pay down debt, the average short-attention-span historically-illiterate voter will just see it as soaking the taxpayer for extra funds when because the money is there to be taken. Which, in a way, it is. But certainly most would not view that as a prudent or responsible action in the current red-meat environment.

If you're doing right by the taxpayer during tough times, it won't really be noticed as much because times are tough, they'll be feeling unhappy and insecure, and they're going to blame the politicians in charge for that.

So, from the "how will this help me in my next/current election cycle" perspective, all saving in good times does is diminish or blunt the potential positive vibes that are out there for the politician to collect if he or she instead gives in to collective public id.

PoloHoleSet
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Found an interesting academic paper which handles the first part of the question. Namely, why countries avoid expenditure cuts in good times. The paper is titled Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2008. Here's a relevant excerpt:

Our findings suggest one possible answer why austerity is often avoided - fear of instability and unrest. Expenditure cuts carry a significant risk of increasing the frequency of riots, anti-government demonstrations, general strikes, political assassinations, and attempts at revolutionary overthrow of the established order. While the type of instability events we analyze are infrequent in normal years, they become much more common as tougher austerity measures are implemented. Anticipated properly, they may act as a potent brake on government policy.

Once unrest erupts, governments quickly reverse course and increase spending in the following year, according to our results – the politics of the street are effective in reversing austerity. The close link between austerity and instability may also help to explain why countries with higher levels of unrest are on average also more indebted.

So the potential for mass protests prevents the government from effectively slashing the budget, regardless of the current economic situation. Also see this related question for a discussion of the problem from a slightly different angle.

JonathanReez
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