- The Washington Times - Sunday, July 28, 2013

The U.S. economy has fared better than expected this year after widespread fears that $85 billion of automatic spending cuts and sharp increases in taxes imposed at the beginning of the year would snuff out growth.

The ability to absorb the first round of across-the-board budget cuts is the latest example in which the U.S. economy has displayed remarkable resilience in the face of austerity. Overall, the economy has weathered one of the steepest drops in federal spending on record in the past four years, with spending falling from 25.2 percent of economic output at the height of the Great Recession in fiscal 2009 to a more normal 21.5 percent this year.

Despite the unprecedented withdrawal of massive federal stimulus from the economy, the abrupt withdrawal of $600 billion of tax cuts Jan. 1, and state and local spending cuts of historic proportions in the past five years, the U.S. economic growth has trudged along at a 2 percent average rate since the recovery began in mid-2009. Moreover, many economists think the rate is poised to accelerate to 3 percent in coming quarters despite continuing budget cuts, while they expect revisions of federal economic output figures due out this week to show that the economy has performed more robustly during the recovery than previously thought.

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“The economic growth trend in the U.S. stands in stark contrast to the fiscal tightening and slowdown observed in other major global economies,” said Steven A. Hess, senior vice president at Moody’s Investors Service. The U.S. “has demonstrated a degree of resilience to major reductions in the growth of government spending” not seen in Europe, Japan or other countries struggling with big debts, he said.

Moody’s, in a pivotal moment for the U.S. economy, affirmed the Treasury’s top AAA rating last week and withdrew a threat to downgrade the U.S. credit rating, citing a dramatic reduction in the budget deficit from a $1.5 trillion peak in 2009 to $640 billion this fiscal year. The rating service cited the economy’s solid performance, a surge in revenue resulting from the tax increases, and deep cuts in defense and other discretionary spending programs mostly imposed on President Obama since Republicans gained control of the House and the federal purse strings in 2011.

Lok Sang Ho, an economics professor at Linghan University in Hong Kong, said the data show that the U.S. has handled its economic and financial crisis better than Europe. “The fact is, America is now firmly on a growth path” with its deficit plummeting, while “Europe is still struggling with recession and surging unemployment, with a deficit problem that does not seem to go away.”

The U.S. economy’s surprisingly good performance “breathes new life into the debate” over whether spending cuts and tax increases inevitably pose threats to growth that political leaders and economists have assumed, said Christopher Papagianis, who was a domestic policy adviser to President George W. Bush.

Rather than faltering in the face of a big dose of fiscal austerity and the “sequester” spending cuts begun in the first quarter, the economy accelerated to a 1.8 percent growth rate from 0.4 percent in the fourth quarter of 2012, and estimates are that growth stayed in the same 1 percent to 2 percent range in the second quarter.

“The policy changes — especially a forecast 5.6 percent cut in discretionary spending — have had virtually no impact on growth rates, but have succeeded in reducing the deficit by $445 billion, or 3 percent,” of economic output, he said.

Still growing

The growth numbers fly in the face of what the “hard-core left in the U.S.” was predicting, Mr. Papagianis noted. Even many respected economists, including Federal Reserve Chairman Ben S. Bernanke, were bracing for a bigger negative impact on growth and were pleasantly surprised when it did not materialize.

While liberals, who continue to agitate against the automatic cuts, struggle to explain their muted economic impact, “the lesson is important for conservatives to learn as well,” Mr. Papagianis said. Tax hikes included in the “fiscal cliff” deal at the beginning of the year have not proved a major drag on growth, either.

“The biggest impact from the move toward austerity was expected to come from the $100 billion increase in payroll taxes” in January, he said. “Many forecasters expected household spending to fall in the first quarter in response to the decline in take-home pay,” but the opposite occurred: Consumers increased spending and financed their purchases by using credit cards and dipping into savings.

The moral of the story: It is OK to impose budget cuts and tax increases once economic recovery clearly has taken hold as it has in the past four years, he said.

“Increases in government purchases can serve a useful purpose when the economy is in a state of free fall, as was the case at the beginning of 2009. But the recovery has been underway for four years” and a “proactive deficit reduction” program was the right thing to do at this stage in the cycle, he said.

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