July 10, 2013

A French Plan to Solve America's Economic Problems

By Jeffrey Folks

On Sunday, IMF Managing Director Christine Lagarde charged that recent U.S. budget cuts were "absolutely inappropriate" and should be replaced with "credible fiscal policies." Ms. Lagarde did not specify exactly what those policies might be or how they would work, but she was certain that the sequestration cuts now in effect are going to damage the U.S. economy.

The sequestration, she said, "blindly affects certain expenditures that are essential to support medium and long term growth." Again, Lagarde did not indicate what those expenditures were. Do they include funding for more IRS Star Trek videos? Bonuses for IRS agents after their involvement in the release of donor lists and singling out of Tea Party non-profit applications? Billions for "bikelanes to nowhere," funded by the Department of Transportation? Eighty billion more in green energy loans? Or just another $2 billion for Job Corps, AmeriCorps, Teach for America, and the like?

Lagarde seems to think that sequestration has cut federal spending to the bone. Actually, only the rate of spending increase has been cut, and that only slightly. Federal spending for FY2012 was $3.6 trillion. Spending for 2022 is projected to be $5.5 trillion. And yet the IMF thinks that the sequestration cuts have been "excessively rapid and ill-designed." Apparently, the IMF is unaware of Speaker Boehner's attempt in the summer of 2011 to reach a budget compromise with President Obama (an effort that was torpedoed at the last moment by Obama's demands for even higher taxes). The IMF also seems uninformed about the Congressional Supercommittee, which failed to reach agreement in the fall of 2011, thus triggering the sequester beginning in 2013. I know that the French move at a slower pace than Americans, what with three-hour lunches and six-week vacances à la plage, but only in France does a two-year budget negotiation qualify as "excessively rapid."

Since when, by the way, does a French former government minister give advice to American taxpayers about how much this country should be spending, or anything else? I was not aware that France was leading the world in economic competitiveness. The unemployment rate in France now stands at 10.4%, the highest since 1998. That is the result of refusing to make serious cuts in government spending (which is over 50% of GDP, among the highest in Europe). Meanwhile, France's perennial budget deficits, now running just under 5% of GDP, have driven down job growth and investment by sucking capital out of the private sector.

It should be obvious to a talented economist like Ms. Lagarde that restraints in government spending lead to higher rates of growth. This has been the case everywhere, from Singapore to Switzerland to the Republic of Texas. The good people of France, on the other hand, enjoy the world's 11^th-slowest-growing economy. Rick Perry ought to be offering fiscal pointers to Ms. Lagarde, not the other way around. But then the French have never been known for an excess of modesty.

Contrary to what many Europeans may think, you can't just spend your way out of a recession, but you can easily spend your way into one. In the long run, as Arthur Laffer has shown, increased government spending always reduces economic growth. Over the last four and a half years, Obama has increased spending from $2.9 trillion to $3.8 trillion. That is one reason economic growth is now running at 1.8%. If it weren't for sequestration, which has at least reduced the rate of spending if not spending itself, America could look forward to decades of sub-par growth. As it is, we may have to experience only four more years of sub-par everything. A post-Obama conservative could turn things around the way Reagan did following the Carter abyss.

It is incredible that the IMF seems unaware of the failure of stimulus spending -- not just under Obama, but everywhere else it has been tried. Even if Lagarde's point is that the cuts have come too soon, one must ask: if not now, when? Under Obama the national debt has exploded to almost $17 trillion. The spending cuts which the left find so odious are only 4.8% of the amount by which federal spending has increased annually under Obama. Another way of saying it is that 95% of Obama's spending increases, for everything from $700,000 for a climate change musical to a million to study the sex-life of fruit flies, remains intact even with the sequester.

To be fair, Lagarde's call for "predictable, credible fiscal policies" is entirely reasonable. But is the IMF chief unaware that the Republican House has passed a "predictable, credible" budget for three years now, only to have Democrats in the Senate sit on their hands? Is she not aware that Obama has threatened to veto any measure that includes spending cuts of any kind? Clearly, an orderly budget process would be preferable to sequestration, but given the political opportunism of Democrats in the Senate and of the president, that is impossible.

If credible cuts actually were made -- cuts going far beyond sequestration and including the elimination of numerous federal departments and agencies, beginning with the IRS -- the process would result in the greatest economic boom in American history. We would enjoy a flourishing private sector, universal employment, and soaring prosperity beyond anything now imaginable. It is true that the Washington elite might have to work for a living. The highly paid bureaucrats and lobbyists would have to pick up their briefcases and go home, where they might find productive employment.

Perhaps that is the future that Ms. Lagarde envisages as well. If so, I applaud her. But if so, I find it difficult to square her criticism of the sequestration -- however modest, the only reduction of federal spending in recent memory -- with her goal of reversing "the debt trajectory." It all sounds too much like Obama's pledge to cut the deficit in half by the end of his first term. (Do the math: the deficit in 2008 was $1.3 trillion; in 2012 it was $1.15 trillion.) If the U.S. cannot cut 2.38% from a federal budget that has been run up by $900 billion over what it was in 2008, exactly how much can we cut? That's a good question for Ms. Lagarde, and for the president.

The fact is that Obama has been following the European model for over four years, and with results similar to those in Athens, Madrid, and Paris. Sequestration brings a small element of sanity to the federal budget process. With the president and Senate Democrats, and apparently Ms. Lagarde, kicking and screaming the whole way, sequestration has cut the rate of growth of federal spending by a very modest amount.

What many in Europe and Washington would have us do is to cut nothing, tack another trillion onto the annual budget, and pass the debt down to future generations. Only it wouldn't make it to future generations. Even as it is, the ruinous effects of the national debt will result in runaway inflation and fiscal collapse. Delaying sequestration, as those on the left suggest, just gets us there sooner.

Jeffrey Folks is the author of many books on American politics and culture, including Heartland of the Imagination (2013).

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