Obama’s Budget: With Job Growth Tepid, Is Now The Time To Cut Spending?

President Obama will release a budget next week that replaces the automatic budget cuts known as sequestration with other spending cuts while also raising $580 billion in revenue and making cuts to Social Security and Medicare. The budget plan, as the Washington Post notes, is almost identical to the offer Obama made to congressional Republicans in an attempt to reach a “grand bargain” to offset sequestration at the beginning of March, and it is aimed at reaching a similar bargain in the near future.

“The president has made clear that he is willing to compromise and do tough things to reduce the deficit,” an administration official told the Post, “but only in the context of a package like this one that has balance and includes revenues from the wealthiest Americans and that is designed to promote economic growth.”

Under Obama, the U.S. has already cut $2.5 trillion from the deficit over the next decade. This plan would offset sequestration with roughly $1.8 trillion in other deficit reduction, including $580 billion in revenues, $400 billion from Medicare and other health programs, $130 billion from applying a new inflation measure (chained CPI) to Social Security, $200 billion from defense and domestic spending, and $200 billion from farm subsidies and retiree programs, the Post reported.

But while Obama remains committed to deficit reduction, there is little evidence that the U.S. needs to continue cutting spending, which has plateaued since he took office in 2009. As the following chart shows, government spending has typically driven economic recoveries, but spending cuts made over the past three years have held back America’s current recovery:

With borrowing costs at historic lows and unemployment remaining persistently high — the economy added just 88,000 jobs in March, according to the Bureau of Labor Statistics — the government could be making stimulative investments into the economy to help boost the recovery. That’s the path Obama originally sought in 2009 with the American Recovery and Reinvestment Act, and it worked: the stimulus turned around the economy and put the U.S. on a faster pace of recovery than Europe, which has consistently pushed to reduce deficits, has experienced.


Sequestration has already begun taking its toll on local economies, kicking children out of preschool programs, hurting schools, closing air traffic control towers, and leading to furloughs and job losses. But it is unclear how replacing it with a “grand bargain” that still cuts spending at a time when the country is experiencing a glut of long-term unemployment and tepid economic growth would make the situation much better, especially if the budget also includes cuts to Social Security and Medicare. There may be a consensus in Washington that cutting the deficit is the top priority, but evidence suggests that the U.S. may benefit more from the pursuit of policies like the American Jobs Act, the legislation Obama sought in 2011 that economists said would have boosted growth while creating more than a million jobs.