The U.S. economic miracle

Llewellyn King

Friday, Feb. 1, 2013 | 2:01 a.m.

The great thing about being a pessimist is that something awful may still happen tomorrow. There are still plenty of pessimists about the economy, saying that we are spending our way into perdition, that the Great Reckoning is just around the corner unless we do draconian things.

However, on Wall Street, there is hopefulness — even optimism. The stock market is up, the housing market is showing real life and corporate confidence has increased since Congress delayed action on the “fiscal cliff” through a bit of old-fashioned give-and-take. Some economists are saying encouraging things; so are the business pundits.

There is evidence that the U.S. economy, still the economic lungs of the world, is breathing easier.

Sure, there was a slight dip in performance in the past quarter, reflecting primarily reduced defense spending. It’s a hard lesson for the political right to grasp: You can’t extrapolate family financial rectitude into national policy, as they like to do. If a family spends more than it is earning, it simply has to cut expenditures. If it doesn’t, the end is known: Credit dries up and horrors, such as foreclosure, are at hand.

When a family gets into trouble, it doesn’t reduce its income by cutting luxuries; it reduces its spending. Likewise, corporations cut costs, lay off employees and sell assets until the balance sheet recovers.

But governments can worsen the situation when they tackle spending at the wrong time. If they cut expenditures too aggressively and too fast, tax revenues fall, unemployment rises and demands on the public purse grow.

Unlike individuals and corporations, governments can’t walk away from their messes.

Witness the recessions in Britain, Ireland, Spain and the total catastrophe in Greece. Irresponsible austerity has compounded the results of earlier promiscuous spending. Strong medicine has sent the patient to intensive care.

Amy Kremer, head of the Tea Party Express, and many conservative members of Congress playing the pessimist’s card, like to say, and they say it often, “Revenue is not the problem; spending is.”

If only it were that simple. The problem is many things, including the global recession, the aging population, the high cost of medicine, two wars, badly timed tax cuts, China’s undervalued currency and the balance of payments deficit. Take your pick.

The miracle is that the economy is as vigorous as it is. Already it has to deal with the tax increases that came with the budget deal in early January, particularly the increase in the payroll tax, which takes out of the economy money that would normally be spent. This may be about as much of a hit as it can take at present.

But the pessimists, who believe that spending is the mortal sin of our age, want to let sequestration — an across-the-board cut — happen March 2. The Center on Budget and Policy Priorities estimates the defense budget would get sliced by 7.3 percent while domestic spending would drop 5.1 percent.

The Washington Post says there is no mood in Congress to compromise. But if there is no compromise, the effects could be more devastating than a simple cut in spending. The result, instead, will be a cut in program expenditures while the government’s overhead in salaries and fixed costs will eat up the budget.

Austerity has been a disaster for Britain, Ireland and Spain. Do we want to follow the Europeans down that path?

The pessimists, who also believe that borrowing is the original sin of politicians, would let this recovery falter through their belief that the government must be starved. Sequestration will starve it, all right. Trouble is, we’ll all go hungry. There’s pessimism for you.

Llewellyn King is executive producer and host of “White House Chronicle” on PBS.