Its official: Deep cuts in federal spending are under way, $85 billion over the next seven months. The question we should all be asking soon is: Where are the jobs?
The reason given by Republicans and conservatives for the urgent need to drastically reduce federal spending was that mounting federal debt and big government was stifling private investment and economic output. Now, we will see whether that justification for the spending cuts was fact or fig leaf.
The truth is that the reductions in spending that will take place over the next year will, at a minimum, have no positive impact on the economy. In the worst case, the cuts could lead to increased unemployment and slower, if not negative, economic growth. In fact, many experts estimate the cuts are most likely to cost jobs: more than 700,000 according to Macroeconomic Advisers LLC.
In no case are the recently enacted sequester cuts likely to stimulate job creation and increased economic growth.
There will, however, be a good deal of measurable and immediate pain for millions of American households directly affected by the cuts. Many of them will be families that have been teetering on the financial edge since the beginning of the recession, and many more will be those who have fallen permanently into "barely getting by" status.
Already, even the modest recovery that is under way is not equally shared. As the Dow last week pierced the 14,000 level to flirt with an all-time high, fourth quarter GDP for 2012 was reported to have increased at an annual rate of a mere 0.1%. Although that estimate could be revised upward in the months ahead, the fact remains that wealthy investors are largely immune to the pain being experienced by a major share of the U.S. population.
According to University of California, Berkeley professor Emmanuel Saez, fully 93% of the increase in total U.S. family income in 2010, the first full year of recovery, went to the top 1%. Public policies such as stimulative Federal Reserve actions that are helping to inflate the stock market, and tax cuts for the wealthy, have combined to create a level of economic inequality not seen in the United States since the Great Depression.
Further, according to Dean Maki, chief United States economist at Barclays, corporate earnings have risen at an annualized rate of 20% since the end of 2008, while household disposable income has barely moved, averaging an inflation-adjusted 1.4% annually over the same period.
The recently enacted sequestration cuts will further fuel the disparity between corporate America, the wealthy and middle class, and the poor.
The truth is that there is no debt crisis that was necessary to address with these cuts. As our economy grows and people get back to work, the debt and deficit will naturally decrease with a rising tax base, increasing consumer spending and the public investment that comes with greater revenue and improved consumer confidence and business sentiment. The most effective way to promote that result, particularly now, given the economy's current slow growth trajectory, is to invest strategically in the economy in a manner that will provide the incentives for new private investment, business growth and ultimately job creation.