The Obama administration is whipping up hysteria over the sequester budget cuts and their impact on the economy, the military, first providers, and so forth and so on. Armageddon. But if you climb into the CBO numbers for 2013, you see a much lighter and easier picture than all the worst-case scenarios being conjured up by the administration.
For example, the $85 billion so-called spending cut is actually budget authority, not budget outlays. According to the CBO, budget outlays will come down by $44 billion, or one quarter of 1 percent of GDP (GDP is $15.8 trillion). What’s more, that $44 billion outlay reduction is only 1.25 percent of the $3.6 trillion government budget.
So the actual outlay reduction is only half the budget-authority savings. The rest of it will spend out in the years ahead — that is, if Congress doesn’t tamper with it.
And please remember that these so-called cuts come off a rising budget baseline in most cases. So the sequester would slow the growth of spending. These are not real cuts in the level of spending. (Not that a level reduction is a bad idea.
Looking at the sequester in this light, it’s clear that it won’t result in economic Armageddon. In fact, I’ll make the case that any spending relief is actually pro-growth. That’s right. When the government spending share of GDP declines, so does the true tax burden on the economy. As a result, more resources are left in the free-market private sector, which will promote real growth.
The Wall Street Journal editorial page points to the Reagan 1980s and the Clinton 1990s, when domestic spending as a share of GDP fell significantly and the private-sector economy boomed. Ditto for the post-WWII period, when spending declines as a share of the economy were quite substantial and the private economy came back strong.
And I would point to the new book from Amity Shlaes, Coolidge. Silent Cal was a manic budget cutter who slashed the level of the budget. And he presided over a tremendous U.S. economic boom. In fact, Coolidge’s budget cuts and Treasury Secretary Andrew Mellon’s tax-rate cuts were a one-two punch that serves as an example of how to fix our ailing economy today.