Federal Spending Cuts Set to Hit a Down Economy

by Wendy Simmons | September 29, 2011 12:38 pm

President Barack Obama and House Speaker John Boehner seemed to be on the verge of a fiscal compromise at several points this summer. Obama signaled he might be willing to accept more cuts, and Boehner signaled “revenues” might be negotiable (although he later denied such an unorthodox position).

As of last week, Obama said unequivocally (no more Mr. Nice Guy) that he wouldn’t sign any legislation that didn’t raise taxes on the wealthiest Americans. Boehner, of course, has clearly instructed the Republicans on the “super committee” to ignore such crazy talk and work only on cutting spending.

Truthfully, we can’t know whether or not the super committee will add revenues to the legislation or call Obama’s bluff and pass a simple spending bill. But, thanks to the bizarre debt-ceiling compromise this summer, we are sure to have at least $1.2 trillion in spending cuts either way.

If the committee deadlocks and can’t get the deal through Congress (or Obama vetoes the package), $1.2 trillion in cuts to the defense department and Medicare providers will automatically kick in. Of course, it could be much more, as there is no upper limit to what the super committee can do.

The implications for unemployment are clear: There are real people working for the federal government that will be laid off as programs are scaled back, post offices are closed and defense contracts are canceled. In fact, unemployment data over the past year confirms that government cuts already account for more jobs lost than any other sector.

While conservatives around the country might experience some elation at the shrinking of the federal government, the ripple effect of these cuts (dare we call it a “trickle down”?) will hit private firms as well, and in a variety of ways.

The implications for senior citizens and their doctors also are clear. While the cuts on the table to Medicare are technically only on the “provider” side, it is seniors that will share the pain  (doctors are under no obligation to accept Medicare patients). General practitioners can make more money by shutting off their practices to older people and increasing the number of younger, healthier and less complicated patients. The baby boomers — 10,000 of whom can enroll in Medicare every day — have a lot to lose in the cutting spree.

Like it or not, it appears we are on the verge of a smaller government.  The only question is whether taxes will be raised in the process.

Bruce Bartlett did us all a favor this week by digging into the details of countries that have an extremely low tax burden. He concludes that despite the fact that Denmark’s tax burden is almost half of GDP (49%), he would rather live there than with some of the “lucky duckies” in Myanmar, Libya and Chad, who enjoy a tax burden of 3%, 3.4% and 5.4%, respectively. It’s hard to argue with that.

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