Freedomnomics

Article published Monday, February 25, 2013, at Investor's Business Daily.

Obama's Sequester Cuts Are A Mere 1% Of Budget

By John R. Lott, Jr.

President Obama is almost breathless predicting "devastating" consequences if the sequester trigger is pulled. He warns the cuts "will hurt our economy ... add hundreds of thousands of Americans to the unemployment rolls. ... The unemployment rate might tick up again."

But will a $44 billion cut in spending out of a $3.8 trillion budget, a mere 1%, really be a "meat cleaver approach" that will "eviscerate" government programs?

Obama frightens people by pretending that the $1 trillion cut takes place right away rather than being spread out over 10 years.

He has taken almost every possible position on spending and taxes. During the 2008 presidential campaign, Obama continually promised to "cut net spending" and make government smaller. The stimulus was promised not to "raise projected deficits beyond a short horizon of a year or at most two."

Yet, during the fifth year of Obama's presidency, we are told that we can't cut spending, that we need even more government "investments."

Obama's first term racked up record spending increases and record budget deficits, but we didn't see much job creation.

As a result, the number of people not in the labor force has grown rapidly, by more than 7 times the number of jobs created. Most of the unemployed have gotten so discouraged that they have stopped searching for work. But the U.S. isn't alone. Across the world, countries with the largest increases in spending or debt have also the fewest jobs created as well as the lowest economic growth.

The damage from larger government is clear if we plot changes in the percentage of the working-age population employed in the thirty-two developed (OECD) countries.

Start with 2007, the last full year before the worldwide recession hit and before governments started their massive government spending programs. And end with 2010, the latest year with enough data available.

To make sure government spending as a share of GDP isn't simply rising because GDP is declining, I show two approaches. The first one looks at government spending a year before changes in the economy's performance. Countries with the largest spending increases fared statistically significantly worst during the recession. Ireland, Iceland, Estonia, Spain and Greece are the most dramatic examples.

The increases in per capita government spending in these countries summing over these three years ranged from 11.1% to 26.1%.

These countries also suffered the deepest declines in GDP, contracting on average by 4.4% between 2007 and 2010. And the share of working-age people who were employed also declined by, on average, 6.6%.

The most frugal countries were: the Czech Republic, Hungary, Israel, Poland, Sweden and Switzerland. Their per capita government spending actually shrank by anywhere from 0.2% to 6.3%. The result? Per capita GDP grew by an average of 7% over the three-year period.

These countries also saw the share of their working-age populations with jobs grow.

Contrast the performance of these frugal countries to that of the U.S., where the percentage of the working-age population employed has fallen well below the 2007 level.

During this period, per capita GDP growth in the U.S. was only a quarter of that of the six most frugal countries.

A second way to look at this relationship is to see how much larger deficits are than they would have been if these economies had normal economic growth. I will follow others and assume that in normal times, government revenue would have grown by 2% a year.

So what results do we get for developed countries? Again, the pattern shows that "austerity" works, Keynesian stimulus does not. More government "stimulus" meant statistically significantly fewer jobs. And, again, bigger stimuluses have a detrimental effect on GDP growth.

Keynesians seem to think that government just creates wealth by transferring money. But the money has to come from somewhere.

More government expenditures mean more taxes either now or in the future, discouraging investment and work. More government appears to be the enemy of growth.

"Austerity" may be a bad word to some politicians, but the countries that followed Keynesian policies have assumed a triad of woes: poor GDP growth, poor job growth and massive debt. Obama needs to stop using economic growth as an excuse for not cutting government spending.

John R. Lott Jr. is a FOXNews.com contributor. An economist and former chief economist at the United States Sentencing Commission, he is also a leading expert on guns. He is the author of several books, including "More Guns, Less Crime." His latest book is "At the Brink: Will Obama Push Us Over the Edge? (Regnery Publishing 2013).". Follow him on Twitter@johnrlottjr.

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