by Jamie Hyndman, Mawer Investment Management
The broad range of self-imposed spending cuts that were thrust on the U.S. federal government, widely known as sequestration, became a topic of great concern over the past few months. As such, when Congress failed to come to an agreement to avert the sequestration cuts, one might have expected chaos in the streets. In his recent State of the Union speech, President Obama himself painted a dire picture of the economy if sequestration went ahead. The rhetoric and numbers thrown about were seemingly alarming â across the board job losses and an $85 billion reduction in spending.
However, sequestration has come and passed. There have been no riots in the streets and few protests of any sort. In fact, not only has sequestration been a non-event, but U.S. equity markets have actually rallied to new highs in recent weeks.
Given the fact that economic growth was already spotty, the complete lack of response has been a curious one. So why has this topic faded from the headlines so quickly? I believe Senate Republican Leader Mitch McConnell said it best when he stated, "it's absurd to think that the government cannot get by with a little more than a 2 percent reduction in spending when every working American had to figure out how to make do with 2 percent less in their paychecks just last month."
It would seem that in the court of popular opinion, there is an appetite for less government. And why not. Since just after WWII, overall government spending in the U.S., for example, has increased substantially from about 17% of GDP in 1948 to about 35% of GDP in 2011.1 Although our world is more complex than ever and many government services are clearly essential, the trend to greater government seems to have gone too far.
So while it may be true in the near-term that less government spending will act as a drag on economic growth, perhaps investors are recognizing the more favourable long-term implications of these spending cuts. Not only is it long overdue for governments to address their imbalances, but it may foster an environment with less government interference and more freedom for corporations to create and compound wealth.
Jamie Hyndman
1 The White House Office of Management and Budget
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