Clowns Never Learn

President Obama said the sequester cuts would be "catastrophic".

Reader Tim Wallace pinged me with a few comments to help put those catastrophic cuts in perspective.

Tim asks: If you were making $50,000 per year in 2007 and you income went up to $70,000 (a 40% increase in six years), would a $1,750 pay cut to $68,250 be catastrophic?

Apparently it would be for the Obama administration. The federal budget is up 40% from 2007 and the Democrats and President are telling us they cannot afford to cut spending 2.5%.

Not that the "cuts" are real in the first place. All that is really being cut is a decrease in the projected increase. A chart of Federal Spending from PJMedia will add another perspective.

Federal Spending in Inflation-Adjusted Terms



Backing Away From Catastrophic Talk

For obvious reasons (shown above) Larry Kudlow notes The 'Catastrophic' Sequester Narrative Dies a Quick Death

However you calculate the sequester spending cuts, and however uneven they may be, the reality is that the sequester at least moves the ball in the right direction. I maintain that by reducing the government spending share of GDP, the sequester is pro-growth.

The White House and the CBO are predicting a 0.5 percent to 0.7 percent decline in GDP, post-sequester, and a loss of 750,000 jobs. All this from a spending reduction of roughly 2.4 percent over the next ten years, in which Uncle Sam's spending growth will be $44.8 trillion rather than $46 trillion.

Fed chairman Ben Bernanke and other demand-siders have called for a slow, gradual federal-spending reduction. Well, that's exactly what they're going to get. The first fiscal year of sequester will see $44 billion in spending cuts, which is about one quarter of 1 percent of GDP. That's pretty gradual.

And compare that $44 billion 2013 spending cut (most of which is slower baseline growth, not a cut in spending levels) to a roughly $150 billion 2013 tax hike. Hmm, let me get this right: It's okay to raise taxes, because that won't hurt the economy, but it's not okay to cut spending, because that will lower output?

And while the business sector has survived to become highly profitable, the federal sector has become bloated, edging ever closer to debt bankruptcy.

Oh, regarding Team Obama's doom-and-gloom economic forecast, hearken back to 2009 when the White House economic gurus predicted 3 to 4 percent real economic growth in recovery, with unemployment dropping below 6 percent. That, presumably, would have been driven by a roughly $1 trillion spending increase. But instead we got the weakest recovery in modern times going back to 1947 -- an anemic 2 percent economy and unemployment just a shade below 8 percent. The trillion-dollar stimulus never panned out.

If Keynesian spending was going to work, it would have already worked.

So maybe we should try something new. Let's lower spending and free up resources for the innovative private sector, and then let's see if the results are better. I'm betting, as did deceased Nobel-prize winners Milton Friedman, Friedrich Hayek, and James Buchanan, that as the government sector shrinks, private economic growth expands.

The Republicans are right to stick to their guns on budget cuts. And if President Obama expects to point his finger at the GOP for an economic-sequester catastrophe, he's going to be mistaken.

Keynesian and Monetarist Clowns Never Learn

Kudlow says "If Keynesian spending was going to work, it would have already worked."

Indeed. Yet clowns want more and more, even though Japan proved in spades how foolish Keynesian and Monetarist policies are. See In Praise of Theft and Fraud (But Not Deceit).

Bernanke (a known QE Monetarist clown) now proudly wears two clown hats with his intrusion into the fiscal policy debate. Clowns never learn, they just keep trying bigger and bigger doses of what clearly doesn't work.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com