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The Congressional Budget Office (CBO) released a letter this week describing how canceling sequestration in 2014 would affect the economy. The CBO dutifully plugged the numbers into its economic model, and the model gave the result it was written to give: more government spending equals more output in the government sector. But looked at more closely, $100 billion in additional debt-fueled spending would depress household income and private-sector jobs in the long run.
First off, cancelling sequestration next year would immediately raise spending by more than $100 billion. That is $100 billion the federal government does not have. With sequestration in place, next year’s deficit is already projected at $560 billion. This would add yet more debt on top of the massive government debt burden piled on the shoulders of the American people, adding drag to already sluggish income growth. According to the CBO:
Although output would be greater and employment higher in the next few years if the spending reductions under current law were reversed, that policy would lead to greater federal debt, which would eventually reduce the nation’s output and income below what would occur under current law.
Second, the American people were able to witness over the past four years that deficit spending only increases the debt. After all, the dollar that goes to pay for government spending must come from somewhere, either from taxes or borrowing. Public debt just about doubled since the stimulus was first enacted, and yet the economy is still stuck in neutral. Why, then, are the CBO and others claiming that more spending today would stimulate growth?
The answer has a lot to do with the way the Bureau of Economic Analysis calculates official gross domestic product (GDP) figures. As George Mason University economist Garett Jones explains:
Government hiring creates GDP by definition. Private hiring only creates GDP if the worker actually creates a product.… Hiring a worker who (through no fault of her own) accomplishes absolutely nothing raises GDP if the government does the hiring. Hiring a worker who (through no fault of her own) accomplishes absolutely nothing does nothing to GDP if the private sector does the hiring.
Why? Because GDP counts government salaries as “government expenditures” as soon as the government hires a person.
This means that even if the government hired workers who hurt the economy by enforcing onerous and unreasonable regulatory requirements against small business owners or by wasting taxpayer money, the hiring would still raise GDP and job numbers. But Americans would be made worse off by needless barriers to business success and government waste.
On the flipside, following through with sequestration increases business confidence that Washington can at least get something done—even though the budget cuts barely even reduce the growth in government spending. As small business owner and certified public accountant Gene Marks writes:
[D]espite all the dire predictions and gloomy forecasts, the sequester has not had the negative affect on the economy that so many people predicted. In fact, I believe the March 1 sequestration has helped the economy. It is comforting to most in the business community that the government still has the discipline and self-control to go through with the cuts that it for so long threatened. It is comforting to know that the legislative branch can stand up in the face of withering criticism and dire warnings from the media and even the president to take action and keep the government’s finances from going off the rails. And it is encouraging to see the economy respond: more housing, increased investments, higher sales, more stability, increased growth, even a 4 percent rise in the Dow since March 1.
The economy has shrugged off the first round of sequestration, and it will shrug off the next. In fact, much bigger spending cuts than sequestration are needed to put the budget on a path to balance. Doing so would improve private-sector job growth and the economy in the long run.
