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Budget cuts will slow economy

Julianne Malveaux | 2/6/2013, 5 p.m.

There is lots of buzz about our nation's "economic recovery" in these first weeks of 2013. The stock market has been rising, some would say even soaring. We postponed the fiscal cliff crisis, albeit only for a few weeks--March is the new deadline.

The tone and tenor of debt ceiling conversations has shifted slightly, though this will not be an issue easily negotiated. President Barack Obama says that raising the debt ceiling to pay old bills is the right thing to do; Republicans in the House showed no reluctance in authorizing spending for two wars and other matters. Now they don't want to pay for it.

Recovery? For the first time since 2009 our economy shrunk in the last quarter of 2012, largely because of cuts in defense spending (that were not balanced by increased spending in other areas), and a sluggish world economy that could not absorb U.S. exports. Also, inventory grew slowly, suggesting that some retailers are pessimistic about the level of spending this year.

Some economists suggest that this drag is a one-time thing since part of the drag has occurred because of factory and retail store shutdowns due to Hurricane Sandy. Additionally, they say that the economy should adjust to defense spending cuts rather quickly. And they cite strong consumer spending and business investment in the fourth quarter as positives.

Even with the fourth-quarter shrinkage, growth in 2012 was higher than growth in 2011, suggesting that we are on the right path to economic recovery.

Just a minute, though. If the economy contracts because of a cut in defense spending, what will happen when federal spending is cut by 7 to 10 percent, either through automatic cuts or budget cutting negotiations. Already, federal departments are making contingency plans for cuts, figuring out ways that three people can do the work of two, and ways programs may be consolidated.

While one quarter of contraction is no cause for alarm, it is certainly cause for concern. Two more quarters of contraction, however mild, will lead us into a recession.

There are other factors of concern as we look ahead. Everyone will get a 2 percent pay cut because the Social Security tax has returned to prior levels, after we have experienced cuts for two years. A family earning $50,000 a year has $1,000 less to spend, and it has already shown up in paychecks for those who are paid biweekly.

Less disposable income means less consumer spending, which means the possibility of economic slowdown since consumer spending drives more than two-thirds of the economy.

Another factor in the possibility of economic slow-down is the troubled employment situation.

Although unemployment rates are lower than they were two years ago, an overall unemployment rate of more than 7 percent is unacceptable.

That means that the African American unemployment rate is likely to remain between 13 and 14 percent, officially, and more than 25 percent unofficially. While we can certainly point to improvement in the employment situation, the economy is not generating enough jobs to lower unemployment rates. Instead we are treading water.