Last Updated:October 30 @ 05:57 pm

Kudlow: No Sequester Catastrophe

By GOPUSA Staff

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 Organization for Economic Cooperation and Development 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 gross domestic product, the sequester is  pro- growth.

The White House and the Congressional Budget Office 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 OK to raise taxes, because that  won't  hurt the economy, but it's not OK to cut spending, because that  will  lower output?

Doesn't make any common 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 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.

So maybe we should try something new. Let's  lower  spending and free up resources for the innovative private sector, and then let's see if the results are better. I'm betting, as did deceased Nobel-prize winners Milton Friedman, Friedrich Hayek, and James Buchanan, that as the government sector shrinks, private economic growth expands.

It's not as though the sequester abolishes public spending. Investor's Business Daily points out that transportation, education, housing, community development, natural resources, farm subsidies and general government have all increased by 25 to 40 percent in recent years. Therefore, you could say sequester is nothing more than a return to normalcy.

And let's not forget that while budget authority declines by $85 billion for one year, Ben Bernanke's Fed is pouring $85 billion  a month  of new money creation (over $1 trillion a year) into the economy. Let's also not forget that the stock market has been going up, not down.

JPMorgan economist Jim Glassman reminds us that a revived housing sector, the energy boom, a rebound in business investment and a renewal of manufacturing activity all will bolster the economy in the period ahead. Monetary conditions, he says, "remain highly stimulative." (Hat tip: Jim Pethokoukis).

No, I'm not making the case that the spending-cut sequester is going to immediately launch an economic boom. But I do believe it will help economic recovery over time. (Congress could help, too, by passing pro-growth corporate tax reform that lowers marginal rates and eliminates cronyist tax loopholes for both large and small businesses. That would be a real economic booster shot.)

So the Republicans are right to stick to their guns on budget cuts. And if President Obama expects to point his finger at the GOP for an economic-sequester catastrophe, he's going to be mistaken.

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To find out more about Lawrence Kudlow and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.

COPYRIGHT 2013 CREATORS.COM

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3 Comments

  1. lokiswifeComment by lokiswife
    March 5, 2013 @ 11:30 am

    Don’t you think that this huge fuss over a 2% budget cut was more for two reasons: Obama could point the finger at the Republicans,give a doomsday speech and make him seem like a hero fighting for America?

    Second: It was a planned distraction from the Benghazi murders. Have you heard anything about Benghazi lately? Experts have said that there is more than enough evidence to start impeachment proceedings, and there is a bill in the House HR36 to get an investigation and report on it. The bill already has 44 co-sponsors, it’s posted on thomas.gov
    Don’t let them bury Benghazi and HR 36.

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  2. arclightComment by arclight
    March 5, 2013 @ 3:33 pm

    No there is no big deal with the Sequester. The biggest problem is that Barry the King could not even bring himself to lessen the blow by deciding what to cut himself. I guess he’s framing that golf shot of him with the Tiger, another moral paragon.

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  3. NY GrahamComment by NY Graham
    March 6, 2013 @ 2:05 pm

    Larry, I am more interested in your opinion on WHY the stock market is bullish right now. What is going on?

    I can’t see any fundamental strength in this economy, and I can’t believe that the new 2013 tax hikes are going to lead to economic growth.

    So what’s going on here? Is it that interest rates are so low that people are forced to stay in the stock market to get a better return on investment? Is it the Fed’s quantitative easing inflating the numbers with printed money? Is this just another bubble, and we should expect it to burst soon leading to another crash?

    Or is the American economy really that resilient? Are American entrepeneurs so determined to succeed that they will continue to do so even under the most anti-business administration since FDR?

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