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Why Sequester Spending Cuts Aren’t Really Scary

Tuesday February 26th, 2013   •   Posted by Craig Eyermann at 5:07am PST   •  

If the looming sequester cuts to the federal government’s spending were a real threat to the U.S. economy, who would be complaining the loudest?

There’s only one correct answer to that question: U.S. companies and corporations. The reason why is because they are the ones who would be most impacted by the negative effects of such spending cuts, which they would feel in the form of reduced revenues for their businesses.

So how concerned are U.S. businesses about the potential for losing income as a result of the sequester budget cuts? James Politi of the Financial Times finds evidence of a dog that doesn’t bark:

U.S. business groups and chief executives are lobbying less aggressively to avert the looming budget sequestration than they have during past fiscal stand-offs, judging the impact on the economy and financial markets to be less severe.

John Engler, president of the Business Roundtable, which represents America’s largest companies, said the automatic spending cuts would do minimal harm, compared with the large tax hikes and possible default on U.S. debt threatened during other big budgetary crises of the past two years.

“[In those instances] there was great concern that it was going to damage the U.S. credit rating or that there would be chaos in the financial markets – that’s clearly not the case with sequestration,” Mr. Engler told the Financial Times, adding: “I think it’s considered de minimus by most people,” he added.

De minimus” being the fancy Latin for “totally trivial”.

That clearly wasn’t the case for the tax rate hikes President Obama desired in the fiscal cliff debate at the end of 2012, the impact of which is clearly hurting U.S. businesses today.

To understand why spending cuts like those of the sequester are considered to be so much less harmful to the economy than increasing taxes, let’s consider the real nature of government spending and taxes.

Here, when government raises taxes to support its discretionary spending, what it is doing is hurting a lot of people a little to benefit just a handful of politically-connected people, who just coincidentally happen to benefit a lot from government contracts (wink-wink). Because the harm is so widespread and the benefit limited to so few, the general economy suffers quite a bit as a result. Those effects are worse when the threat of additional tax increases remain after tax rate hikes are implemented.

But when a government cuts its spending, those dynamics work in reverse. Instead of lots of people being harmed a little, only a handful of people are. And since those people are significantly less likely to be engaged in sustainable economic activity in the first place, the economy at large is barely affected when their access to taxpayer money to fund their business income is reduced.

And that, in a nutshell, is why spending cuts are better for the economy than tax hikes for balancing a government’s budget.

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February 2013