The stock market is influenced daily by a lot of factors ranging from world events to market indicators to government policy decisions. In that sense, it would be wrong to attribute recent gains in major indices, such as the Dow Jones Industrial Average, entirely to sequestration — the fancy term describing the across-the-board automatic spending cuts that went into effect late last week because Congress and the president failed to reach an agreement on budget reforms.
However, it would be entirely accurate to say Wall Street does not view sequestration as a threat to the economy. Quite the opposite — anything that slows the growth of government and, subsequently, government debt, will help the economy grow.
And so the contrast this week between Wall Street and Washington has been stark and telling. President Obama spent much of the last week warning about the dire consequences of sequestration. Other politicians of both parties were not far behind him, with each side casting blame on the other. Wall Street, on the other hand, shrugged its shoulders and kept running the bulls, reacting more to a European Union agreement to bail out Cyprus and a Chinese commitment to a plan for growth than to predictions that a few government-related jobs would be lost in the United States. Chicken Little, once again, didn't get it right.
Washington's focus has been disappointing. The first few months of an administration ought to be the least political and the most far-sighted, simply because it is a time far removed from the next election. Instead of trying to gain political points through blame and dire predictions, politicians ought to be engaged in an honest discussion about how a smaller, more fiscally sound government would spur private-sector growth. Then they ought to engage in serious negotiations as to how to bring about even greater cuts than sequestration in a rational manner. As government spending falls in relation to Gross Domestic Product, more wealth is available to the private sector, leading to a growth in jobs and job-creating innovations.
The sequester is not the most productive way to bring this about. It imposes cuts haphazardly, and it deliberately avoids any changes to major entitlements, which are responsible for much of the federal budget's runaway growth. But it at least is a move in the right direction.
It's also not nearly as drastic as the political class would like you to believe. The reduction amounts to 2.4 percent less growth over 10 years. If it is allowed to remain in place, the reduction would amount to a scant $44 billion in 2013, nearly all of that a cut from projected growth rates, not from actual baseline budgets. It's as if your boss told you your raise would be not quite as large as you had counted on this year. You still, however, would get a raise.
As many private-sector workers know, ever since 2008 such a thing would be considered good news. That was the year the housing market collapsed, the Dow began a 54 percent slide and banks suddenly stopped lending. Private businesses have had to restructure, lay off workers and hold the line on other expenses, if they were lucky enough to remain in business. Despite their efforts, the economy still has struggled to grow amid massive public debts and market uncertainty.
Now it appears some serious growth is underway, with new orders and import orders surging. Sequestration hasn't slowed this down a bit. That ought to give Washington a clue.