Politics & Policy

The Pro-Growth Sequester

No, it’s not Armageddon.

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.)

#ad#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.

And here’s an important point: Despite all the pessimism these days, spending as a share of GDP has actually come down in recent years. Part of this is a result of the moderate recovery, as spending on income security and other counter-cyclical measures has slowed down. But part of it is the continued battle over actual spending reductions. Most of that battle has been waged by the Republican House in post-election 2010, 2011, and 2012, right up to the current sequester (which was Obama’s idea). Including spending fights over continuing resolutions and debt-ceiling increases, the GOP has actually done better than it thinks.

Here are the numbers: Federal outlays as a share of GDP peaked at 25.2 percent in fiscal-year 2009, fell to 24.1 percent in 2011, and came in at 22.8 percent in 2012. The long-term historical norm is about 19 percent, so spending is still way too high. But some progress has been made. And if the GOP sticks to its guns and implements the current sequester, a lot more progress will be made, opening the door to a stronger economy.

In other words, lower spending and limited government are the exact right medicine for free-market prosperity. The sequester cuts are pro-growth. Finish the job, please.

– Larry Kudlow, NRO’s economics editor, is host of CNBC’s The Kudlow Report and author of the daily web log, Kudlow’s Money Politic$.

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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