The new ‘‘Spending Reduction Act of 2011’” bill will be introduced to the House of Representatives shortly. It is a plan “To reduce Federal spending by $2.5 trillion through fiscal year 2021.” The results of many of the cuts will almost certainly be regressive. But,tax cuts are popular now, so that does not seem to matter to the supporters of the bill. They clearly think lower taxes will stimulate economic activity and offset any harm government cuts may do to damage GDP expansion.
The proposal has a number of novel ideas. One is that federal government spending will no longer rise with inflation. Another is that there will be discretionary spending limits for non-defense items. The bill also aims to kill any stimulus programs put into place two years ago if they require more capital in the future.
The complicated legislation also has proposes to consolidate agencies and cap certain federal employment levels. Among the programs in the bill is one to sell off federal property which does not have any immediate use. That may include Yellowstone National Park.
Most of the bill’s logic is poorly argued. Some of its aims, which include the end to Fannie Mae and Freddie Mac, are nearly impossible. The housing market cannot do without their functions in place. There are very few economists who would argue otherwise.
The goal of the legislation is to bring back the $100 billion budget cut which was criticized as unrealistic the day many Republicans proposed it. The bill does not allow for any substantial military cuts or a decrease in Social Security or Medicare. It has been pointed out often that the federal budget cannot really be cut by much unless these programs are immune from cuts.
The most remarkable assumption behind the bill is that the cuts, whether realistic or not, will have no effect on the economy. That means receipts to the Treasury can remain on the plans set out in the budget. It is assumed that any federal employee who loses a job is not a consumer and that all the stimulus money to be spent in the future is a waste.
The proposals about budget cuts are no longer merely a partisan question. They have become an issue of whether the government can shrink rapidly without any effect on US business, finance, or commerce. The reality is that the stimulus package did not meet its goals. Some argue it was too small. Others say it was aimed at the wrong part of the economy. No one can say what would have happened to US GDP and unemployment without the $787 billion investment. Most experts acknowledge that it at least saved or created jobs, perhaps more than one million of them.
Onefailure of the federal government is that it allowed itself to get too large, some economists and politicians argue. That has made current deficits impossibly large. Perhaps much government spending over the last ten or twenty years was a complete waste and did nothing at all to stimulate the economy.
Most Americans think the economy is still in recession. Unemployment and housing would support that. But, there is no way to look back and say for sure what federal expenditures were useless and which helped drive GDP higher. What is certain is that a drastic and rapid cut in spending now will take some bone with the fat, and that is something the economy cannot afford.
Douglas A. McIntyre