Budget Cuts Put Republican Credo to the Test

Sequestration is by no means a welcome event, but it may serve at least one useful purpose: testing Republicans' theory that cutting government spending will jump-start economic growth.

Sequestration is by no means a welcome event, but it may serve at least one useful purpose: testing Republicans' theory that cutting government spending will jump-start economic growth.

Republicans have long insisted that Washington's "spending problem" is what stands in the way of a more robust economy and that winnowing outlays will open the economic spigot. Representative Kevin Brady, a Texas Republican and the Joint Economic Committee chairman, wrote recently: "Time and time again, economic studies have shown that countries that reduce their government deficits through spending cuts -- rather than tax increases -- can boost economic growth and job creation even in the short term."

The $1.1 trillion in spending cuts that began going into effect on Friday will largely solve the nation's short-term deficit problem, allowing the U.S. to reach the holy grail of a deficit equaling 2.4 percent of gross domestic product and a debt load under 70 percent by 2014. Such levels will allow the U.S. to "stabilize" its debt, weaning the nation off of an over-reliance on borrowing and giving the private sector more confidence to invest in a fiscally responsible U.S.

Yet the economic impact of this cutting is expected to be muted, at best.

The Congressional Budget Office projects all the recent fiscal tightening -- including $85 billion spending cuts ushered in as part of sequestration -- will slow GDP growth by 1.5 percent and cost 750,000 jobs this year while keeping unemployment near 8 percent.

Things pick up somewhat in 2014, with CBO projecting GDP growth of 3.4 percent and an average of 3.6 percent a year from 2015 through 2018. Even so, the economy is expected to remain "below its potential (or maximum sustainable) level until 2017," CBO says. And much of the economic boost will not be attributable to spending cuts but to a long-awaited recovery from the housing and financial crises that decimated the economy.

Part of the problem is that sequestration is being applied in a way that, as President Barack Obama put it, is "just dumb" since it doesn't target cuts efficiently or effectively. While there's no doubt Washington can rein in spending and reduce its reliance on debt, it must be smart about what it cuts and when -- a balance that's missing from sequestration.

The blunt knife will cause such economic damage because it's fairly unsparing, slashing $55 billion from defense spending and the remainder from non-defense discretionary spending this year alone. Such indiscriminate chopping will necessitate layoffs at schools, firehouses and military bases -- not often cited as areas most in need of fat-trimming. Sequestration will also be economically painful in the short-run since it hits programs for those with limited means, including housing assistance. That's about as pure a form of stimulus as one can get, since the money goes directly back into the economy.

This is one reason why Republicans are now trying to tweak the "meat cleaver" approach in a bill aimed at funding the government beyond March 27, when the so-called continuing resolution expires. Republicans would still apply the sequester-levels of spending but give the Pentagon more flexibility in where it cuts. Representative Mac Thornberry, a Texas Republican who chairs the Intelligence, Emerging Threats and Capabilities subcommittee, said the legislation won't "undo sequestration, but it is going to add flexibility and it is going to update the categories which will reduce some of the damage that comes from having a continuing resolution and sequestration at the same time."

Democrats, meanwhile, want to use that desire for flexibility to secure sequester changes of their own -- primarily additional tax revenue to offset some of the cuts. Senate Minority Leader Mitch McConnell continued to rule that out this weekend, telling CNN's State of the Union program that while his party is willing to talk to Obama "about reconfiguring the same amount of spending reduction over the next six months. . . . I haven't heard a single Senate Republican say they'd be willing to raise a dime in taxes to turn off the sequester."

Only time will tell whether Washington's "bloat" is what's truly holding back the U.S. economy, but sequestration may be the Republican Party's worst chance to prove a long-standing talking point.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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