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The Spending Sequester Will Grow the Private Economy -- Donít Back Off ^ | January 31, 2013 | Larry Kudlow

Posted on 01/31/2013 4:57:02 AM PST by Kaslin

Yesterday's report of a 0.1 percent GDP decline for the fourth quarter came as a surprise to most forecasters. But it actually masks considerable strength in the private economy. Namely, housing investment in the fourth quarter jumped 15.3 percent annually, business equipment and software spiked 12.4 percent, and real private final sales rose 2.6 percent. All in, the domestic private sector of the economy increased 3.4 percent annually -- a very respectable gain.

And here’s one for the record books: Working ahead of year-end tax hikes, individuals shifted so much money to the fourth quarter at the 35 percent top rate that personal income grew by 7.9 percent annually -- a huge number. And there’s more: In order to beat the taxman, dividend income rose 85.2 percent annually. You think tax incentives don’t matter? Guess again.

Now, all this private-sector strength occurred despite the fact that government spending -- namely military spending -- dropped 6.6 percent. Inventories also lost ground and the trade deficit widened.

But here’s a key point: Military spending has now fallen virtually to its lower sequester-spending-cut baseline. It did so in one quarter by about $40 billion. So the brunt of the impact over the coming years has already been felt. (Normally, as of recent years, military spending has been virtually flat.)

Which leads me to another key point: Even with the fourth-quarter contraction, the latest GDP report shows that falling government spending can coexist with rising private economic activity. This is an important point in terms of the upcoming spending sequester. Lower federal spending, limited government, and a smaller spending-to-GDP ratio will be good for growth. The military spending plunge will not likely be repeated. But by keeping resources in private hands, rather than transferring them to the inefficient government sector, the spending sequester is actually pro-growth.

Big-government Keynesians think big spending provides big growth. They are wrong. This has been a 2 percent recovery -- the worst in modern times -- dating back to 1947. So let’s try something different. Let’s shrink government. Let’s let the private sector breathe and generate entrepreneurship and risk-taking.

Spending is the true tax measure of the economy, according to Milton Friedman, Friedrich Hayek, and others. Even a modest sequester spending cut of maybe $60 billion in 2013, and perhaps more than $1 trillion over ten years (most of which will come from a slower spending growth rate, not real reductions), will be the best thing to inspire business and market confidence as well as international credibility. And it maybe even shave a point or two off the spending share of GDP.

On March 1 the spending sequester is supposed to kick in by law. If Congress wants to help the U.S. economy, the best thing it can do right now is implement this sequester. Then it can round out an even larger growth package, including large- and small-business tax reform and adjustments to stop entitlements from going bankrupt.

TOPICS: Business/Economy; Editorial

1 posted on 01/31/2013 4:57:08 AM PST by Kaslin
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To: Kaslin

I think the sequester should happen. It is the only way there will be real cuts.

The congress can come along behind and tidy up programs that should get some more money and correct unacceptable administration cuts.

The sequestration cuts are the opposite of cuts down the road. The plan will be partial reinstatement down the road.

2 posted on 01/31/2013 5:05:42 AM PST by bert ((K.E. N.P. N.C. +12 .....The fairest Deduction to be reduced is the Standard Deduction)
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To: bert

“I think the sequester should happen. It is the only way there will be real cuts.”

I couldn’t agree with you and Saint Lawrence of Lower Manhattan more, Bert. The 4Q12 GDP data were excellent, despite the surprising headline, fatally underming the argument made by Krugman and the other Left Keynesians that marginal government spending is stimulative in an economy operating with a fiscal deficit exceeding 9% of GDP.

The GOP needs to achieve spending cuts without further tax increases, at least marginial income tax rate increases, for political reasons and America needs this to happen to an even greater degree for economic reasons. Anyone with eyes to see can discern that the sequester is the only mechanism by which any meaningful cuts will be made.

Sorry Pentagon, but you’re going to have to tighten your belt. Somehow, I think you’ll manage.

Conservatives understand that Washington is incredibly inefficient and could provide the same minimal benefit to the country that it does currently at a substantially lower cost if it had the will to do so or the Sword of Damocles daangling above its head compelling it to. Why they have come to believe that the Pentagon is the only place in Sodom on the Potomac that is immune to this disease escapes me.

Let the cutting begin.

3 posted on 01/31/2013 5:42:26 AM PST by irish_links
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