My short answer is “no”, and the longer answer follows.
The Transportation Secretary and other government officials have claimed on television that government cutbacks would have catastrophic effect on airline travel, various other government programs, and overall employment if no deal with Congress is reached prior to March 1 when the so-called “sequester” starts. At that time, a series of cuts in government spending will automatically begin according to a schedule laid out over a year ago.
Although the set of agency cuts in spending mandated by the sequester is far from the best way to cut federal spending, as I discuss later, a few calculations show that in the aggregate the spending cuts will not have disastrous consequences. The Congressional Budget Office estimates that if the sequester goes into effect, actual federal spending, which lags appropriations, would decline by about $44 billion over the next seven months. Budget authorizations would decrease by about double that amount, to $85 billion, in the fiscal year ending in September. That is a huge amount of money to you and me, but even the authorized cuts are only a little over 2% of the projected federal budget during this fiscal year. Officially, government spending would continue to be cut for several years under the sequester plan, but no one expects the plan to be continued even for a year, let alone for
The federal government is not the most efficient spender of taxpayers’ money, so slight improvements in efficiency of spending would easily compensate for much of the mandated decline in appropriations in most agencies. Even without improved efficiency, the 2 per cent decline in overall spending by different agencies would not have a major impact on most government services-I discuss possible exceptions later on. For comparison, a similar cut to families with $60,000 annual income would require them to get by for a year with $58,800. Adjustments would be required to be sure, but spending would not fall catastrophically. Of course, for political reasons, federal agencies might intentionally cut activities that would cause the most inconvenience to consumers in order to create the most complaints against the cuts, and put pressure on House Republicans.
The federal budget was already quite large in 2008, and spending has grown by many hundreds of billions of dollars since then. This implies that even after the first year of the full implementation of these budget cuts, the federal government would still be spending far more than it did a mere 4 years ago. Of course, the increase in spending since then has not been uniform across agencies, with Medicare and Medicaid, and government welfare programs expanding more rapidly than most other forms of spending.
The best way to cut overall government spending is to reduce spending on those programs that can be done almost as well, or even better, by the private sector, and maintain, or even increase, those programs where private spending would be poor substitutes for government spending. The latter include defense, spending on infrastructure, such as roads and good teachers, safety nets for low-income persons, and basic research, such as trying to find ways to sequester carbon emissions, and trying to find cures for various cancers and Alzheimer’s disease. The sequester program requires half the cuts to come from national security and military operations. I do not know if too much or too little is spent on the military, but government spending in these areas obviously cannot be effectively replaced by private spending on protection against terrorism and other threats. Yet even spending on the military would only fall by 3.8% during the next 7 months.
Various other activities of the government can be done much better by the private sector without government subsidies, such as production of ethanol, fossil fuels, and alternative energy sources, such as solar and wind power. It also suggest scaling back some of the welfare programs that expanded rapidly during past few years, programs that contributed greatly to the sharp decline in the labor force of lower skilled and younger workers (see Casey Mulligan, The Redistribution Recession).
The sequester-mandated cuts in spending exclude social security and Medicaid, and requires senseless cuts in Medicare. In light of the greater health and life expectancy of older Americans, one effective way to cut spending on social security and Medicare would be to raise the eligibility age gradually over the next decade to 70. Additional savings on Medicare can also be achieved if a voucher program replaced the current system. The richer elderly should get smaller vouchers, and everyone should be
allowed to top up their vouchers with private spending, presumably most of that covered by private insurance.
Some economists have argued that the mandated cuts in government spending are particularly inappropriate at this time since the US is not fully recovered from the financial crisis. Since reduced government spending of $44 billion over the next seven months only a little over ¼ of 1 percent of GDP, this is not likely to have a major effect on the economy, even without any replacement of reduced government spending by greater private investment and other spending. The $85 billion decline in appropriations would be more disrupting, but still would not amount to a lot, especially since the private sector appears to be picking up more steam.