What is happening? What can be done better? Some experts weigh in.
The hysteria of President Obama, liberals in Congress, and the media over very small cuts in federal spending from the sequester — in contrast to their indifference over regulations imposing massive new costs on job-creating private firms — illustrates a central contradiction of progressive economic thought.
On the one hand, progressives believe the U.S. economy is so fragile that even the mere threat of cuts in government spending would be disastrous. On the other hand, they believe this same economy is so resilient that billions upon billions of dollars in regulatory costs have no effect on growth at all.
In late January, the Conference Board — a private group — announced that consumer confidence had plummeted over the preceding month. One day later, the Department of Commerce reported that the U.S. economy had actually contracted by 0.1 percent in the fourth quarter of 2012. Then, on Friday of that week, the Labor Department announced that the unemployment rate had ticked back up to 7.9 percent.
The establishment media and liberal politicians, including President Barack Obama, downplayed the news or blamed phantom “spending cuts.” Hardly anyone brought up the dramatic increase in regulation over the last few years and the fear that President Obama’s reelection opens the door to a massive onslaught of red tape.
The Washington Post published a news bulletin blaming the weak economy on “cuts in government spending, fewer exports and sluggish growth in company stockpiles.” The “cuts in government spending” part is wrong on its face. According to the U.S. Treasury Department, as John Nolte pointed out on Breitbart.com, government expenditures in the fourth quarter were actually up by more than 10 percent from the previous quarter.
In the first weekly address he delivered after these disappointing reports, President Obama stuck to the spending-cuts narrative, blaming “bad decisions” by Congress and warning ominously that “we can’t just cut our way to prosperity.”
This is the meme that Obama has repeated in the weeks leading up to the sequester.
But we certainly can’t regulate our way to prosperity either, and at the rate the Obama administration is going, we could be regulating our way to recession. Instead of blaming Congress for the economy’s struggles, the president should be blaming his own administration for piling on regulation after regulation — what has been called the “regulatory cliff.”
President Obama’s reelection made it highly unlikely that job creators will get any substantial relief from the costly new provisions of the Affordable Care Act, or from Dodd-Frank, the banking overhaul that hits many community banks and non-financial businesses hard.
As Adam J. White noted recently in The Weekly Standard, “The Obama administration’s first three years of major rules, costing up to $26.7 billion, were five times more burdensome than the Bush administration’s first three years ($5.3 billion) and three and a half times more burdensome than the Clinton administration’s ($7.6 billion).” White adds that these “major rules” were only a fraction of the 3,500 total regulations Obama has issued so far, and that the cost figures did not include the opportunity costs of blocking the Keystone XL pipeline.
The president’s reelection means that executive agencies that had been facing bipartisan criticism for being out of control before the election, such as the Environmental Protection Agency and the Department of Labor, now have free rein. Indeed, after the election, a torrent of new regulations that had been on hold for more than a year were suddenly released — in President Obama’s December Unified Regulatory Agenda and elsewhere.
National Journal reported just after the election that “federal agencies are sitting on a pile of major health, environmental and financial regulations that lobbyists, congressional staffers and former administration officials say are being held back to avoid providing ammunition to Mitt Romney and other Republican critics.”
As my Competitive Enterprise Institute colleague Ryan Young has put it: “Now that this ammunition will no longer have electoral consequences, the EPA can move ahead on delayed rules on everything from greenhouse gas emissions to ozone standards. Rules from the health care bill and the Dodd-Frank financial regulation bill also likely will make themselves known in the weeks to come.”
If there’s one thing worse for the economy than uncertainty, it’s the certainty that thousands of pages of new regulations will go into effect. The fourth-quarter economic contraction was likely caused by entrepreneurs’ and investors’ seeing this future of shackling regulations and pulling back their investments in response.
The good news is that these economic problems can be fixed if the regulatory onslaught is reversed or at least significantly reduced. To get the economy growing again, President Obama and Congress should focus on “sequestering” the most costly and least beneficial rules and making the “regulatory cliff” smaller.
— John Berlau is a senior fellow for finance and access to capital at the Competitive Enterprise Institute. Evan Woodham, a CEI research associate, contributed to this article.
BURT FOLSOM JR.
The much-ballyhooed “sequester” is a cut of $85 billion in a nearly $4 trillion federal budget. Good, let’s do it. Sure, some of the programs to be cut have merit, but cuts must be made in federal spending if the U.S. is to remain a prosperous country. Sequestration is the only chance we have had, and probably ever will have, to cut any federal programs under President Obama.
Let’s put the problem another way. The U.S. currently spends $40,000 more than it takes in every second of every day of the year. The cuts, if enacted, will reduce that to $37,200 per second. Is the proper question, “Are the cuts too drastic?” Or is the better question, “What else can we cut, and when can we start?”
At the end of World War II, FDR wanted more federal spending, but he died in 1945. The Republicans prevailed and drastically cut the 1946 federal budget. What happened? Investment picked up, entrepreneurs expanded production, and unemployment fell to a very low 3.9 percent. Budget cuts and tax cuts are the health of the economy.
— Burton Folsom, Jr. is the author of New Deal or Raw Deal? (2008) and co-author with Anita Folsom of FDR Goes to War, which will be published in October by Simon & Schuster.
The CBO projects that tax revenue relative to GDP will increase by about 25 percent over the next two years. Top-line revenue is set to double over the next decade, and by the end of that period its size relative to GDP will be about two percentage points above what it has been over the past 40 years. Despite that, deficits are massive. The Democratic party and President Obama demand tax increases at every turn, and act as if the sequester will be an extinction-level event.
It might seem odd that the Democrats have taken this course, but it should not. A massive welfare state has been constructed that will, absent legal changes, cause us to evolve into a European-style social democracy. The only question is, how do we pay for it? Democrats are now convinced that they can squeeze blood from Republicans one “crisis” at a time and stay one step ahead of the bond raters. Who can say they are wrong?
The cost, of course, is that the net worth of our children is being squandered on the consumption of today’s leviathan while the capital formation that should feed growth moves to China. Republicans are right to fight this fight, and if they lose, they can be consoled by how wonderful American craft cheeses have become.
— Kevin Hassett is a resident scholar with the American Enterprise Institute in Washington, D.C.
The sequester is national politics at a new low. They’ve become academic. The old joke is that the politics in academia are so fierce because the stakes are so low. The sequester cuts are $85 billion in a $3.6 trillion budget — that’s two cents on the budget dollar. Or $85 billion in a $16 trillion economy — half a penny on every dollar of GDP. How low do you want to go?
Yes, this is a nadir for national politics, federal budgeting, and federal governance. And, yes, Republicans had a clearly superior policy approach to avoiding the cuts. It involved replacing them with cuts that were spread out over a longer period and focused on the part of the budget that is the real problem: mandatory spending (also known as entitlements).
The Democrats, meanwhile, continued to focus on messaging at the expense of policy. They let every House initiative die in the Senate months ago. Even a mere three days before the sequester is scheduled to occur, the Senate continues to dither. Three months after his reelection and his subsequent victory in the fiscal-cliff deal, the president continues to campaign for poll-tested tax hikes instead of governing.
So the Republicans would be better if they were in power, right? Maybe. After all, the question is not really just about better policy. It is about governing, and governing when federal power is split between the parties — a situation that is more the norm than the exception. If roles were reversed, would Republicans provide the missing leadership necessary to get a deal?
Let’s hope so. After all, it is not just that the political system can’t find a path to cutting $85 billion from federal spending. It also can’t come to terms with the need to reform a broken entitlement system. It can’t find a way to reduce future discretionary spending. It can’t solve tiny problems when the nation faces dire ones.
— Douglas Holtz-Eakin is president of the American Action Fund.
LAWRENCE W. REED
No one would ever argue with a straight face that this is the way to run an enterprise — a household, a business, a government, or anything else. We send people to Washington to make tough decisions. Then they put the toughest ones on a kind of auto-pilot.
I take that back. The sequester will not implement any tough decisions. All the sequester does is cut one-fortieth of projected non-entitlement spending over the next decade. That comes on the heels of a bipartisan explosion in federal spending over the last decade. Yet not a soul in the “we don’t have a spending problem” Democratic party, and only a handful of Republicans, can muster the courage to endorse specific cuts of the magnitude that would put Washington’s fiscal house in order. A truly “tough” (and urgently necessary) decision would be to lop off entire departments, functions, and purposes of the federal Frankenstein, but almost no one is talking about that.
If history repeats itself, then this is Rome in the last century before Christ, when the Republic crumbled as demagogues raided the treasury to pay off their favored constituencies. It was said a century later that Nero fiddled while Rome burned. Today we have a “leader” who has no time to fiddle because he’s too busy stoking the spending fires.
Americans who haven’t yet had enough of Big Government should awaken to the destructive and dysfunctional buffoonery that it is. Why would anybody of sound mind and character want to trust their future to it?
— Lawrence W. Reed is president of the Foundation for Economic Education — www.fee.org — in Irvington, New York and Atlanta, Georgia.