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Thursday, February 28, 2013

The Real Problem With the Sequester
By A. Barton Hinkle
Thursday, February 28, 2013

To hear President Obama and his hod-carriers in the prestige press tell the tale, the sequester that is about to commence will produce an economic and social-welfare apocalypse of nearly biblical proportions. About that, there are three points worth making.

The first is that the sequester was Obama's idea in the first place. When the White House pitched the idea to House Speaker John Boehner, he balked. When it pitched the idea to Senate Majority Leader Harry Reid, he called the proposal "insane." But the administration pressed, and eventually got its way. Having gotten its way, it now prophecies doom and destruction as a result of the very policy it produced.

The second point is that those prophecies of gloom and doom are, very likely, overwrought. Take projected defense cuts. On a micro level, they will cause genuine pain as federal workers are furloughed and weapons contracts are torn up. On a macro level, however, the effect of such activity is not likely to be nearly so great as the White House – and, to be fair, Republican politicians in defense-industry states like Virginia – would have everyone think.

As Benjamin Zycher of the Pacific Research Institute has pointed out, "real defense expenditures grew every year from 1981 through 1989 and then fell in eight of the subsequent 11 years." If defense spending is so crucial to the economy, then you would expect GDP to rise and fall accordingly. But it didn't. The economy grew steadily every year in that period except for 1982 and 1991.

Still, there's little dispute that the sequester could do some damage. This brings us to the third point, which has to do with the most serious problem related to the sequester: That is the fact that federal spending is now so thoroughly interwoven into the fabric of the national marketplace that we have to worry about its effect in the first place.

How did we get to the point where the health of the world's largest economy is contingent on fluctuations in government spending? The full answer to that is an epic saga. But we can sketch out the bones of the story easily enough.

One of the largest drivers is social-welfare spending, which has more than doubled in the past 20 years (after adjusting for inflation). According to the Heritage Foundation, fully 62 percent of the federal budget now goes to entitlements. Jeffrey Miron, writing in National Affairs, notes that "if the $1.45 trillion in direct [federal] anti-poverty spending in 2007 had been simply divided up among the poorest 20 percent of the population, it would have provided an annual guaranteed income that year of more than $62,000 per household." Unfortunately, "much of the redistribution goes to middle-class families," while more is siphoned off to pay for the operation of the various programs aimed at fighting poverty.

Those programs are the result of Lyndon Johnson's famous War on Poverty – an enterprise that has cost upwards of $16 trillion to date, with no end in sight. Johnson's 1964 State of the Union address announced the commencement of hostilities against poverty with martial rhetoric. He declared "unconditional war"; warned that "no single weapon or strategy will suffice"; asserted that the "attack, to be successful," would have to be waged "in the field, in every private home, in every public office, from the courthouse to the White House. . . "

In other words, full national mobilization was needed to meet an urgent crisis. But as Robert Higgs has explained at length in his excellent "Crisis and Leviathan," government uses crises to amass power and resources beyond what is necessary – and then retains much of those powers and resources long after each crisis has subsided. The result is what Higgs and others have described as a one-way ratchet of government expansion.

A look at WWII illustrates his point nicely. In 1940, federal outlays totaled less than (brace yourself) $10 billion. By 1945 they had soared to nearly 10 times that level. After WWII they fell again – but not to anywhere close to pre-war levels. In 1948 they were still three times as high as they had been only eight years before.

So it has been with the War on Poverty as well: Programs have proliferated and grown to the point that now, counting only programs that are means-tested, there are now 126 federal anti-poverty programs that cost, in 2012, nearly $670 billion.

Efforts to roll back the growth of government, by contrast, look remarkably feeble. Although Ronald Reagan promised to "control the runaway growth of federal spending," from 1980 to 1988 federal outlays nearly doubled. Much of this was owing to Reagan's defense buildup – which, many argue, was justified by Soviet expansionism. The trouble is that Reagan did not offset that buildup with cuts in social-welfare spending. The result was a massively larger federal leviathan.

A similar pattern occurred under George W. Bush. In response to the crisis of 9/11, Bush launched two wars. But far from slashing social spending, he also added significantly to it with the Medicare Part D prescription-drug benefit. Conservatives, too busy cheering on the expansion of military might, did not bother to object much to these increases in social-welfare spending. The Obama presidency has produced a similar dynamic. Liberals, delirious with joy at the current president's expansions of the welfare state, have not groused too loudly about the growth of Pentagon spending. That growth represents another case of ratcheting: Despite the drawdown of two wars, Pentagon spending will continue to rise. The sequester might slow the rate of growth, but it will not produce year-over-year reductions in defense appropriations.

The result of all this is that the federal government consumes, over time, a greater and greater share of the economy. As recently as 1948, total federal outlays were only 11 percent of GDP. But they keep creeping up, and now stand at roughly 23 percent. If forecasts are accurate, they will reach 35 percent of GDP within a couple of decades.

And therein lies the real problem. If government were small, then abrupt changes in federal outlays would hardly matter. Because government is huge, they matter considerably. President Obama is wrong to pretend that if the sequester gives the federal government a cold, the rest of America will catch malaria. But given the immense degree to which federal spending is now interwoven with the rest of the economy it should be no surprise if, when Washington gets the flu, America gets the sniffles.  

A. Barton Hinkle is an editor and columnist at the Richmond, Va., Times-Dispatch and a contributor to Reason magazine.

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