Deficit Hawks Balk as Government Cuts Become Real

Construction of the F-35 Lightning program draws on the contributiuons of more than 1,300 suppliers in 47 U.S. states and Puerto Rico. Photograph by USAF

Sam Graves, a Republican congressman from Missouri, doesn’t like big government. “A long-lasting and sustained recovery will never be achieved through massive government spending programs,” the chairman of the House Small Business Committee wrote back in February, praising the job-creating powers of small business. That same post called for “living within our means here in Washington.”

On Thursday, Graves held a hearing on what it would mean to small businesses if the government actually took a step toward living within its means—as it’s scheduled to do in January—and it’s not pretty. Automatic spending cuts worth $1.2 trillion over 10 years begin in 2013 if Congress doesn’t act. Deficit hawks like Graves are balking as the real implications of that fiscal discipline become clear. The defense-heavy cuts (known as sequestration, in Beltway jargon) would eliminate 2.14 million jobs, nearly half of them at small businesses, according to testimony (pdf) from George Mason University economist Stephen Fuller. (We should note here that the analysis was conducted for the aerospace and defense lobby.)

Most of those projected job losses would come from federal contractors, their suppliers, and other businesses that would lose revenue when federal employees and contractors lose their salaries: their dry cleaners and car dealers and roofers and coffee shops. Some small contractors are already going out of business, as my Bloomberg colleague Danielle Ivory reports.

M.L. Mackey, chief executive of Beacon Interactive Systems, which makes software for the Navy, told the committee her Cambridge (Mass.) company has already trimmed staff because of uncertainty ahead. “We, like many other small businesses in this sector, have had to tighten our belts in anticipation of the rough times ahead,” she said (pdf).

The money to pay federal contractors has to come from somewhere: higher taxes (which Republicans oppose), more borrowing (which Republicans oppose), or other spending cuts. In May, Republicans led by Paul Ryan proposed cutting social programs instead of defense to avoid the sequestration, a nonstarter with the Democratic Senate and President Obama.

The current predicament is the result of last year’s compromise needed to raise the debt ceiling over Republican objections. That bill set in motion automatic spending cuts that would take place if Congress didn’t reach an agreement to reduce the deficit.

Both sides bear responsibility for the mess. The White House missed its deadline to detail how the cuts will be made. And the entire deal was engineered to avoid another vote on raising the debt ceiling before the election.

Graves isn’t the only one to have second thoughts. California Republican Buck McKeon, chairman of the House armed services committee, said in July that he regretted voting for the debt deal, according to Politico. He also held a hearing Thursday with military leaders. McKeon blamed the Obama administration for failing to prepare for the cuts if Congress can’t find a solution during the lame-duck session. “The lack of planning and the failure to exercise leadership now can make a dire situation worse. Gentlemen, we understand that there are no easy choices here, but now is not the time for ambiguity,” McKeon said.

Nearly everyone agrees that the automatic spending cuts would be an economic disaster. Graves says he favors more targeted cuts: “a scalpel rather than a meat cleaver.”

When Graves supported the deal last year, he wrote: “This bill is good for small business because it addresses our out-of-control debt without any job-killing tax increases, which will help provide much-needed certainty for our nation’s most robust job creators.”

In prepared remarks for Thursday’s hearing, Graves said (pdf): “The sweeping, unfocused cuts of sequestration are certain to have unintended negative consequences, including for America’s small businesses.” He also cited “the lack of certainty that small businesses are already facing due to sequestration.”

Apparently, massive government spending programs are sometimes good for small business after all.

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