Sequester Cuts Will Hurt the US: Kyle
It seems increasingly unlikely that the sequester will be avoided at the end of this month. But one thing should be made clear: "Fixing" the required spending cut of $85 billion this year by merely redistributing these cuts to other programs really isn't much of an improvement from a macroeconomic point of view and in fact may be substantially inferior if it is your job or program that would be cut.
The original sequester deal struck in 2011 would result in cuts to spending only – the President would like to make this package half tax increase and half spending cuts equally weighted toward defense and domestic programs.
Congressional Republicans want spending cuts to fall mostly on domestic programs while avoiding tax increases altogether.
(Read More: Are You Ready for the Pain of Sequestration?)
Lost in all of this is the glaring fact that we should not be cutting spending or raising taxes at all!
We should have a stimulus, not a cut!
Merely rearranging the pain does little to change the overall macroeconomic balance or the calculus of austerity induced contraction.
The experience of Europe is clear: Deficit cutting in the middle of a recession neither sparks growth nor does it lower deficits. The UK is the best example of this – after a few years of Mr. Cameron's austerity, Britain is headed back into recession and the debt is as big as ever. Even the IMF – a bastion of deficit hawks since its birth decades ago – has admitted that the European experiment with recessionary austerity has been a bust. The clear lesson is that when you implement spending cuts – which all of our Econ 101 texts label a "contractionary policy" – what you get is a contraction!
(Read More: Critical Differences Belie Hopes for a Grand Bargain)
Our own history supports the need for a stimulus. We had a far higher debt / gross domestic product ratio at the end of WW2 but instead of cutting spending or raising taxes we invested in ourselves, building the interstate highway system, passing the GI Bill and much more. We never did pay down any debt but the economy grew so much faster that both the debt and deficit shrank as a percentage of the overall economy.
But if the politicians in Washington are determined to ignore not only economics but the negative experiences of the European austerity fanatics as well as our own history, then big cuts to the military budget aren't really such a bad idea. After all, our military budget is substantially bigger than the next 10 countries combined. Can it really be true that national security will be endangered if we cut $40 billion out of the military at the same time we are ending two wars?
(Read More:Automatic Spending Cuts Threaten National Parks)
National security comes at its most basic level from economic strength. We get that from improving our productivity and our economy – something that is in danger if we persist in ignoring investments and repairs in our basic infrastructure that are going to have to be done sooner or later anyway. Doing them now would not only avoid high cost rebuilding later but would also generate lots of jobs, turning those unemployed people into tax payers. Besides, what better time to invest in infrastructure maintenance and repair than when interest rates are zero? Are we really going to wait to do it until interest rates get back up to 5%?
(Read More: 5 Reasons Not to Fear the Dreaded Sequester)
Steven C. Kyle, an expert in macroeconomics and government policy and a professor at Cornell's Dyson School of Applied Economics and Management.