We could all use a shot of optimism, and as usual Brian Wesbury is there to provide.
In an outlook released last week, the outspoken chief economist of First Trust Advisors takes Nouriel Roubini (as he frequently does), Bill Gross and others head on in his view of the sequester, the possibility of another recession and job growth.
“The double dip that never was, is certain this time…right?” he rhetorically, and somewhat sarcastically, begins. “When automatic federal spending cuts—the sequester—takes place on March 1, just say sayonara to economic growth.”
The first thing to realize, he reassures, is that implementing the sequester is not the end of the world. Citing the Congressional Budget Office, he argues that if the sequester goes into effect as scheduled, it will reduce spending from its current path by $43 billion over the last seven months of this fiscal year—March to September. While this is 2% of all federal spending over that timeframe, he notes, it’s only 0.5% of GDP and it’s not an actual cut in the level of spending.
“Many pundits throw around a figure of $85 billion in 'cuts' for the remainder of this year, but that refers to 'budget authority,' not outlays. (Budget authority is what an agency can spend, outlays are what it actually spends.) Yes, if the sequester stays in place, outlay cuts would catch up to cuts in budget authority. And, contractors could lay off people today if they don’t see the authority for future spending.”
But the reduction in planned spending increases of just $43 billion will not be as catastrophic as many fear, Wesbury counters. The phase-out of the payroll tax cut of the last two years, all by itself, is supposed to raise revenue by more than $100 billion per year.
The result of all this?
Wesbury has yet to see evidence of a downturn.
“Most importantly, this whole argument about spending cuts is based in Keynesian economics and misses the point. Federal spending is way too high. And every dime the government spends must be paid for by the private sector, in the form of taxes or debt (which is just taxes at a later date). The bigger the federal government, the smaller the private sector, the less dynamic the economy is and the fewer jobs are created.”
He believes the sequester could be good for the economy and job creation. His biggest worry is that after March 1, the president will make a simple request to add back to military spending without finding budget cuts elsewhere to pay for it, “or worse, with tax hikes, and Congress goes along. That would reverse the positive impact of the sequestration.”
The bottom line, he concludes, is that the supposed negative impact of spending cuts is “a figment of the exaggerated and fearful nature of the punditry. Don’t fear the sequester; lean into the wind and pray that someone in [Washington] is willing to do the right thing.”