In just over two weeks, the “sequester”, automatic spending cuts first proposed by the White House in the debt ceiling talks in 2011, will take effect. Unless Congress and the President agree to alternative spending cuts, which seems unlikely, discretionary spending will be cut around $100 billion this year. The looming prospect of cutting federal spending by 2.5% has turned a host of pundits into modern-day Cassandras, warning of an imminent recession.
If a $100 billion reduction in planned government spending can tip a $15 trillion economy into recession, then the economy is far weaker than anyone has acknowledged. Since Obama took office, we’ve had trillions of dollars in stimulus, whether through government spending or Fed easing, thrown at the economy. Yet, it seems, a cut in government spending equal to 0.6% of the economy is enough to push us into recession.
It’s funny, but I don’t recall similar hand-wringing or recession fears when Obama and the Democrats were pushing to raise taxes by $100 billion a year, the amount yielded by letting all the Bush tax cuts for those making more than 250k expire. We were told that would strengthen the economy by taking money out of the economy, from the wealthy, to trim the deficit. Simply trimming the deficit an equal amount by cutting spending, however, is an economic calamity.
I’m not a big fan of the sequester. Across-the-board spending cuts, especially in Defense, are not the best way to cut spending. Not every dollar the government spends is equal. It may be far better to preserve some programs while cutting others much deeper. The sequester also largely exempts entitlement spending, which is the real driver of our spending problem.
That said, the sequester is at least an actual cut in spending, rather than a reduction in some future planned baseline spending. Crossing this elusive threshold makes it worth any short-term pain in specific industries or regions.