Tuesday, November 24 , 2015, 9:38 pm | Mostly Cloudy 59º

Larry Kudlow: Spending Sequester Will Grow the Private Economy

By Lawrence Kudlow | @larry_kudlow |

Wednesday’s report of a 0.1 percent gross domestic product 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 all, 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 10 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.

Larry Kudlow is economics editor at National Review Online, host of CNBC’s The Kudlow Report, and author of the daily web blog Kudlow’s Money Politic$. Click here to contact him, follow him on Twitter: @larry_kudlow, or click here to read previous columns. The opinions expressed are his own.

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» on 02.01.13 @ 09:53 AM

Nice try Larry, but the problem with your hypothesis is that we are raising taxes too.  We won’t have private sector growth with higher taxes, especially if those taxes are focused on the wealthy, who are the engine of job growth and economic growth in general.  Most of the private sector growth that you cite from the GDP report came from accelerated actions due specifically to those tax increases.  In other words, they were one-time gains that will not be repeated, and worse, they occurred at the expense of gains that would have occurred in future periods.  Look at dividends - accelerated dividends in Q4 robbed future period dividend payments that will hurt economic growth in the future.  We will see that negative impact in 1Q13.  Government spending cuts are only going to make things worse.

» on 02.01.13 @ 03:05 PM

Craig you can’t get something from nothing. Out side of long term investment in R&D the government has the worst ROI of any entity in our economy. Cutting government spending is paramount to reducing that wasteful consumption of capital. Cutting government research will hurt us down the road. Cutting entitlements will help.

But more than anything else, just freeing up capital so that gamblers, looters, pirates and pillagers can further squander this country’s vast wealth is not the answer. Our focus should be on liberating capital for those enterprises that actually return more value to the economy as a whole than their operators put in their pockets, less emphasis on money managers and more on manufacturers. Our goal should be to turn our trade deficit into a trade surplus.

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