Sunday, April 10, 2011

Not Just a Matter of Size

There are no easy answers for the federal budget, so I don’t want my comments here to be taken as a criticism of it. It is far better, in my opinion, that we have the budget we ended up with this weekend than to not have a budget. Still, the budget compromise will have economic consequences that we may not be ready for. It is important to keep the size of the cuts in context: smaller, perhaps, than what will ultimately be needed, but nevertheless the largest decrease in the scale of any national government ever. And it is not just a matter of size. The budget cuts that were finally agreed on were not selected to spare the national economy. Some of the cuts that the House selected will reduce the size of the economy by more than three times the amount of money nominally saved. For these cuts, there is no budgetary gain to be found — the lost tax revenue is about the same size as the foregone spending. Initiatives that will ultimately be needed to get the economy growing again were cut right along with programs that are essential for the safety of workers in the U.S. economy. Productivity, obviously, will suffer as a result, resulting in some ugly GDP numbers and some inflationary pressure.

In terms of the operational footprint of the U.S. government, cuts on this scale have been attempted only once before, in 1981 when Reagan took office, and they threw the economy into a decade-long funk that culminated with the biggest banking crisis in the country’s history. The current cuts are happening when the economy is already staggering and the banking system already falling apart. These cuts, and the subsequent cuts that will be needed in the budget for the coming fiscal year, will reshape the United States in a bigger way than what happened in the 1980s, and this time, the changes will hit essentially all at once.