Opinion: Economy: The other fallout from Japan

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The earthquake and tsunami that pulverized much of Japan last week are taking their toll on global stock exchanges, including the Dow, which fell an additional 1% Monday morning. One fear is that Japan’s economy -- the third or fourth largest in the world, depending on whether you consider all of the European Union countries as a single entity -- will take a beating, and its decline will ripple across the rest of the world’s markets.

Add that threat to the checklist of black clouds hovering over the economic recovery. Others include the stubbornly high unemployment rate, sliding property values (a problem exacerbated by the growing mass of homes that have been or are sure to be repossessed), and the deep spending cuts by state governments across the country.

Why, then, are lawmakers in Washington so eager to slash federal spending immediately, which economists project would lead to lower U.S. GDP growth? For example, Federal Reserve Chairman Ben Bernanke estimated that the $61 billion in cuts sought by House Republicans would lead to 200,000 fewer jobs being created. Other economists say that the cuts would acts as a much larger drag on the economy.

Granted, readers aplenty believe that state and federal governments should cut back because that would allow for lower taxes, reducing the ‘deadweight loss’ to the economy (that is, the amount of economic activity that’s curtailed when taxes increase the cost of a service, good or activity past its perceived value). The flip side of those cutbacks, though, is that other kinds of economic activity and employment are curtailed. In particular, it can mean fewer teachers, public safety workers, road builders, counselors and the like.

In other words, not only does the money for government have to come from somewhere, the money spent by government has to go somewhere. Some of those dollars certainly could have been put to better use by the private sector had they not been collected in taxes, but a new Bloomberg poll suggests that the public places a high value of the government services that are consuming most of those dollars (at least on the federal level).

The mounting federal debt is a real problem, but growing the economy is part of the solution. The tsunami places another hurdle in the way of that growth. There seems little point in making matters even worse by making sharp, sudden cuts now in non-defense discretionary spending when the real solution lies in curbing the appetites of much larger segments of the federal budget.

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-- Jon Healey