Yesterday’s cold shower of a GDP estimate showing a slight contraction in the fourth quarter of 2012 was a portrait miniature of the epistemological divide over the federal government.
Most economists attributed the 0.1 percent dip to a sharp decline in military spending. Yet hardline fiscal conservatives — and by “hardline” I mean those who believe that immediate fiscal consolidation will unleash growth — were having none of this “The Pentagon did it” business. Here’s Breitbart columnist John Nolte, for instance: “There was no decrease in government spending during the fourth quarter of last year. In fact, the government spent more money between October and December of 2012 than it did during the previous two quarters. So federal spending actually increased during the 4th quarter.”
Larry Kudlow took a slightly more nuanced view; he acknowledged the fiscal drag from lower military spending but noted “considerable strength in the private economy.” Kudlow insists that additional cuts to the Pentagon and other federal agencies scheduled to arrive on Mar. 1 as part of the dreaded budget “sequester” will boost growth further:
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.
But the White House—hell, probably a majority of Republicans—obviously doesn’t see it that way. It sees the possibility that the sequester could shave off 0.7 from this year’s GDP.
With this sword of Damocles hanging over a fragile economy, the House GOP may be able to extract significant concessions from the White House in forthcoming budget negotiations. As of this moment, and seemingly without premeditation, they’ve set the table perfectly: a faction of Republicans convincingly appears as if it’s willing to let the sequester kick in—despite the hit it will deliver to friends in the defense contracting industry.
A headline in The Hill newspaper: “GDP surprise fails to shift debate over ending sequestration.”
And in Politico: “House GOP unafraid of cutting.”
The debate over the sequester was supposed to be a less dramatic second act of this year’s fiscal showdowns. Paul Krugman told us so. But yesterday’s GDP scare may have changed things; it may have given Republicans slightly more leverage to press for long-term budget changes.
The deal, as I see it, sounds like this: Republicans can demand of Obama, “Give us entitlement reforms and we’ll turn off the sequester. If you don’t, we may slide into recession. No government shutdown. No default. Just a good old-fashioned recession. Is that how you want to begin your second term? You may blame us, call us reckless. We’ll make the case to the public that the blood-sugar of your fake recovery has finally crashed.”
Is the House GOP leadership prepared to make this threat?
I think it is.
In effect, it already has.