When 2012 ended, everyone celebrated 2013 with some joy because a planned government shutdown on Jan. 2 was averted.
Unlike a natural disaster, the looming threat of a sudden decline in government spending was not a surprise. It had actually been worked out by Congress in legislation passed last August to create a process called “sequestration.” Under this plan, there would be huge, automatic and instant spending cuts throughout much of the federal government – what was called the “fiscal cliff” – unless the Congress could meet spending and deficit targets by Jan. 1.
The VA was protected from direct cuts under the sequestration agreement. But if it was possible to dump the August deal, could the promise to protect VA funding and benefits also change?
The mere prospect of sequestration was not without impact. According to the Bureau of Economic Analysis the economy grew by 3.1 percent in the third quarter of 2012. In the fourth quarter – and much to the surprise of many people – the economy didn't expand, it shrank by .1 percent.
Consumer confidence “plunged in December as consumers confronted the rising likelihood that political gridlock would push the country over the fiscal cliff,” according to the University of Michigan.
Why the difference in growth rates and public confidence? Look no further then the debate in Washington.
“The federal government,” said the New York Times, “helped bring the economic recovery to a virtual halt late last year as cuts in military spending and other factors overwhelmed the Federal Reserve’s expanded campaign to stimulate growth.”
The Weekly Standard explained that the Pentagon “cut spending in the last quarter by 22 percent, the largest such cut in 50 years. Along with a decline in inventories, that reduction in government spending accounted for most of the 0.1 percent fourth-quarter GDP decline.”
Defense contractors estimate that had the sequester actually gone through an additional two million jobs would have been lost, according to the magazine.
Under the Budget Control Act of 2011 VA benefits and funding were supposed to be immune from sequestration cuts. But vets and military households are also part of the general economy. You might be able to get a VA loan with no money down and low rates, but you still have to make the monthly payment. That's something that could be tough when there are fewer jobs or when governmental agencies outside the VA are cutting programs.
What we have at work are the economics explained by John Maynard Keynes. Keynes (1883-1946) said that for economies to grow, there must be spending. That spending could be in the form of truck purchases, redecorating or buying a new home, but when consumer spending is insufficient to maintain the economy, then it's the job of government to spend more to avoid depressions, even if that means deficits. In effect, government spending is a tool to manage the economy.
What happened in the fourth quarter is simply a demonstration of Keynesian economics. We spend federal money on defense appropriations and when we do we provide financing for companies and jobs for workers. We can shift our spending priorities from, say, defense to delivering the mail twice a day, but when the economy is weak, a government which cuts spending – or is perceived to be spending less – can also reduce economic growth.
It's not just Keynes who believes that government spending can be used to control the economy. At the American Enterprise Institute, John H. Makin says “the lessons from Europe and Japan are that austerity, per se, is not the way to move to a sustainable fiscal stance. Rather, the US economy needs a combination of tax reform to boost growth and legislation enacted now to stabilize the future growth of outlays on entitlement programs.”
The new argument in Washington will now concern how we reduce government spending and raise federal revenues. We actually know the answer: According to the Heritage Foundation, we had government surpluses in fiscal 1998 through 2001 – by the calendar that's roughly the four consecutive years from 1997 through 2000. During this same period, the economy grew and output per worker also increased, according to the Federal Reserve Bank of St. Louis.
In fact, the economy – and the government – had been doing so well that in 2004 the Congressional Budget Office predicted the complete elimination of the deficit by 2014.
Claims that VA funding and benefits are off the table in the current Washington debate sound good and hopefully are true, but what will happen in a few months when the deficit issue arises again? Given the stakes involved it would be wise to follow the adage of a recent President when it comes to continued VA programs and funding – trust, but verify.