March 2013

The Sequester and the Urgent Need for Limited Government

By John R. Hendrickson

The debate over economic policy is taking center stage around the issue of government spending and tax policy. President Barack Obama and Democrat leaders are campaigning for additional spending and higher tax rates. President Obama is even arguing that unless Congress acts to avoid the $85 billion in spending cuts due to sequestration, the result will be catastrophic for the nation. His argument is that an $85 billion cut in government spending will result in a depletion of critical services from national security to education.

President Obama has already added $6 trillion to the national debt, which is at a dangerous $16.4 trillion and for the last few years the government has run trillion dollar deficits. This major increase in federal spending has not only propelled the nation into a true fiscal crisis, but it has also failed to bring economic recovery as promised. President Obama’s attempt to scare the nation with his rhetoric is shameful. As columnist George F. Will wrote in regard to the President’s claim that sequestration will bring hardship upon the nation:

As in: Batten down the hatches — the sequester will cut $85 billion from this year’s $3.6 trillion budget! Or: Head for the storm cellar — spending will be cut 2.3 percent! Or: Chaos is coming because the sequester will cut a sum $25 billion larger than was just shoveled out the door (supposedly, but not actually) for victims of Hurricane Sandy! Or: Heaven forbid, the sequester will cut 47 percent as much as was spent on the AIG bailout! Or: Famine, pestilence and locusts will come when the sequester causes federal spending over 10 years to plummet from $46 trillion all the way down to $44.8 trillion! Or: Grass will grow in the streets of America’s cities if domestic agencies whose budgets have increased 17 percent under President Obama must endure a 5 percent cut![1]

Michael D. Tanner, a Senior Fellow with the Cato Institute, notes the important point that the spending cuts are not actually literal spending cuts:

Actually, the sequester doesn’t cut federal spending at all, or rather it cuts it only in the Washington sense of any reduction from projected baseline increases is a cut. In reality, even if the sequester goes through, the federal government will spend more every single year. In fact, in 2023 it will be spending $2.39 trillion more than it does today.[2]

President Obama’s opposition to the sequester cuts is directly connected with his belief that Keynesian-style government spending will drive economic growth. This fact was proved wrong by President Franklin D. Roosevelt’s New Deal and by the President’s own economic record.

Columnist Larry Kudlow noted correctly that “lower spending and limited government are the exact right medicine for free-market prosperity. The sequester cuts are pro-growth.”[3] Perhaps the best historical example that follows Kudlow’s point is the economic policies of Presidents Warren G. Harding and Calvin Coolidge. The Harding and Coolidge administrations followed a policy of not just cutting tax rates, but also cutting government spending. These policies began under Harding, who died in office, but Coolidge continued the tax and spending reductions as President. The result was economic prosperity or what became known as “Coolidge Prosperity.”

David Pietrusza, a historian and biographer of Coolidge, described the economic record of the Harding-Coolidge program:

  • National debt declined from $22.3 billion in 1923 to $16.9 billion by 1929.
  • Federal budget of $5.1 billion in 1921 reduced to $3.3 billion in 1929.
  • Cut taxes four out of his [Coolidge] six years as President.
  • Cut highest effective tax rate from 50 percent (1922) to 25 percent. Revenue from that tax bracket rose from $77 million to $230 million.
  • Unemployment averaged 3.3 percent from 1922 to 1929.
  • Gross National Product increased 7 percent yearly 1924 to 1929.
  • Per capita income grew 30 percent from 1922 to 1928.
  • Wage earners’ real earnings jumped 22 percent from 1922 to 1928.
  • Industrial production increased 70 percent from 1922 to 1928.[4]

The limited-government policies initiated by both Harding and Coolidge demonstrated that cutting both government spending and tax rates does not result in the type of fiscal Armageddon that the President claims will occur unless Congress acts to prevent sequestration. Other examples, such as the pro-growth policies followed by President Ronald Reagan which led the nation out of a dismal economic period, also provide evidence that limited-government policies work to create economic growth.

The current debate over government spending is also demonstrating how far the government has drifted away from the Constitution. As an editorial in the Pittsburgh Tribune-Review recently stated:

The sequester debate also has exposed anew how the federal government has its tentacles wrapped around the states’ throats — taxpayer dollars laundered through the Washington middlemen and back to the states to pay for everything from teachers and teacher aides (a local function), to Head Start services (a failure), to tuition subsidies (that only jack up the cost of tuition).[5]

The federal government has assumed too many responsibilities, while the states are becoming mere administrative districts of the federal government. This was not the original intention of the Founding Fathers. As the late Senator Barry M. Goldwater wrote, “the federal government must begin to withdraw from a whole series of programs that are outside its constitutional mandate…”[6]

The $85 billion sequestration cut is far from being a “true” threat, but the true threat rests in the reality of the federal government’s spending addiction, which is driving the fiscal crisis. The solution, thankfully, is simple. Follow a policy program that is committed to both spending and tax reduction.

John R. Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] George F. Will, “The manufactured crisis of sequester,” The Washington Post, February 22, 2013, <http://www.washingtonpost.com/opinions/george-will-the-manufactured-crisis-of-sequester/2013/02/22/d22d4466-7c81-11e2-82e8-61a46c2cde3d_story.html> accessed on February 25, 2013.

[2] Michael D. Tanner, “The fairy tale on spending cuts,” The Cato Institute, February 22, 2013, <http://www.cato.org/publications/commentary/fairy-tale-spending-cuts> accessed on February 26, 2013.

[3] Larry Kudlow, “The pro-growth sequester,” National Review Online, February 20, 2013, <http://www.nationalreview.com/kudlows-money-politics/341136/pro-growth-sequester> accessed on February 26, 2013.

[4] David Pietrusza, Calvin Coolidge: A Documentary Biography, Church & Reid books, Lexington, Kentucky, 2013, p. 368.

[5] Editorial, “The sequester: deception and lies,” Pittsburgh Tribune-Review, February 25, 2013, <http://triblive.com/opinion/editorials/3548575-74/cuts-spending-congress#axzz2M16J8HIJ> accessed on February 26, 2013.

[6] Barry M. Goldwater, The Conscience of a Conservative, MJF Books, New York, 1990, p. 53.