America’s Sequestered Recovery

BERKELEY – The United States is confronting another round of cuts in federal government spending, this time threatening to trim at least 0.5 percentage points from GDP growth and to precipitate a loss of at least one million jobs. Automatic across-the-board spending cuts, the so-called “sequester,” would reduce spending by $85 billion, with defense programs cut by about 8% and domestic programs by about 5% this year – and with additional cuts of comparable dollar amounts every year until 2021.

All major government functions – national security, foreign aid, basic research, emergency relief, and education, to name a few salient examples – would experience an immediate and sizeable funding hit. These cuts, along with the tax increases agreed to in January, would knock about 1.25 percentage points off 2013 GDP growth, consigning the economy to another year of tepid recovery and disappointing job gains.

The real aim of the sequester’s advocates is a smaller federal government – a goal that often is cloaked in the argument that excessive government spending is choking economic growth. Although this is a politically compelling argument, because it stokes public fears about an out-of-control deficit, it flies in the face of the facts.

Anemic government spending, not profligacy, has been a major factor behind the economy’s lackluster recovery. According to a recent report by the Congressional Budget Office, large spending cuts by state and local governments – and, more recently, a significant reduction in federal spending – have contributed to the unusual and prolonged weakness of aggregate demand.