Opinion

No sequester catastrophe

Photo of Larry Kudlow
Larry Kudlow
Senior Contributor, CNBC

President Obama may be backing away from his doomsday spending-cut predictions as the sequester goes into place. But the new party line is that while there will be no impact in the first few days, there’ll be a slow, downward slump after that.

What, are we to believe that lower spending and smaller government damage the economy? Doesn’t that run counter to virtually every reasonably objective study in recent years — including ones from a number of U.S. academics and the OECD in Europe — that describe how countries with lower government spending grow more, and how countries with higher government spending grow less?

However you calculate the sequester spending cuts, and however uneven they may be, the reality is that the sequester at least moves the ball in the right direction. I maintain that by reducing the government spending share of GDP, the sequester is pro-growth.

The White House and the CBO are predicting a 0.5 percent to 0.7 percent decline in GDP, post-sequester, and a loss of 750,000 jobs. All this from a spending reduction of roughly 2.4 percent over the next 10 years, in which Uncle Sam’s spending growth will be $44.8 trillion rather than $46 trillion.

Fed chairman Ben Bernanke and other demand-siders have called for a slow, gradual federal spending reduction. Well, that’s exactly what they’re going to get. The first fiscal year of sequester will see $44 billion in spending cuts, which is about one-quarter of 1 percent of GDP. That’s pretty gradual.

If it isn’t, you’re telling me there’s never a good time to cut spending. Nonsense.

And compare that $44 billion 2013 spending cut (most of which is slower baseline growth, not a cut in spending levels) to a roughly $150 billion 2013 tax hike. Hmm, let me get this right: It’s okay to raise taxes, because that won’t hurt the economy, but it’s not okay to cut spending, because that will lower output?

That doesn’t make any sense.

Let’s not forget that in recent years, there isn’t a U.S. business large or small that hasn’t had to undergo major belt-tightening. But where’s the federal government’s belt-tightening? Federal civilian employment has increased substantially during this period. And while the business sector has survived to become highly profitable, the federal sector has become bloated, edging ever closer to debt bankruptcy.

Oh, regarding Team Obama’s doom-and-gloom economic forecast, hearken back to 2009 when the White House economic gurus predicted 3 to 4 percent real economic growth in recovery, with unemployment dropping below 6 percent. That, presumably, would have been driven by a roughly $1 trillion spending increase. But instead we got the weakest recovery in modern times going back to 1947 — an anemic 2 percent economy and unemployment just a shade below 8 percent. The trillion-dollar stimulus never panned out.

If Keynesian spending was going to work, it would have already worked.