Will the Sequester Start Another Recession?

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SEQUESTRATION FEBRUARY 28, 2013

Will the Sequester Start Another Recession? Answers from actual economists from across the political spectrum

With $85 billion in budget cuts set to take effect Friday, when the sequester kicks in, there's been plenty of debate about whether the economy will spiral back into a recession. In search of some clarity, The New Republic asked economists from across the political spectrum a simple question, "Will the sequester start another recession?" The answers were a bit more complicated.

It could. And either way, it's dumb policy.

"My reaction is possibly, but improbably. That said, it's pushing policy in exactly the wrong direction. At a time when the economy still needs a stimulus to promote recovery rather than restrictive policies to prevent overheating. I think job one economically today is to restore full employment, that is today's problem. Tomorrow's problem will be to deal with long term budget imbalances, but trying to curb long term budget imbalances now carries the high probability of delaying economic recovery and the possibility of turning recovery into decline and, were that to happen, it would be a major misfortune for the nation." — Henry Aaron, senior fellow of economic studies at the Brookings Institution

Probably not. But we'll notice a difference.

"In my view it will have a noticeable hit on the growth rate of between 0.5 and 0.9 percentage points. That won't put us in a recession but it will definitely slow improvements to unemployment and the job market." — Austan Goolsbee, professor of economics at the University of Chicago and former chairman of the Council of Economic Advisers

It's certainly not good for the economy.

"It's not helpful. However, trading the sequester for long-term Social Security and Medicaid/Medicare benefit cuts would be worse. Short-term cuts are fairly easy to reverse if it's done quickly." — James Galbraith, economist, University of Texas at Austin

Friday isn't doomsday. But the second quarter won't be pretty.

"The one thing we know about economic behavior is that we are not likely to see sharp changes happening just because a deadline rolls around. People adjust their behavior as they start to expect changes in their budget… We are not going to see a sharp discontinuous change in the economy when we wake up Friday. We will start to see it in the employment numbers and the GDP growth numbers for the second quarter of the year." — Betsey Stevenson, associate professor of public policy at the University of Michigan

A recession's not likely, but growth will be slow.

"If the sequester takes effect and stays in effect for the year I suspect it will lower real GDP growth by .5 percent points and lead to the loss of between 500,000 and 700,000  jobs. No, I don't think it will lead to a recession, I just think it will lead to slower growth than would otherwise be." — Jared Bernstein, Senior Fellow at the Center on Budget and Policy Priorities

Really slow.

"While the sequester cuts will not lead to a recession, it would slow growth by roughly .5 to .7 percentage points in 2013." — Dean Baker, co-director of the Center for Economic and Policy Research

And it will shatter our confidence.

"I certainly wouldn't expect the sequester to cause a recession—it's not big enough. A reasonable guess is that it takes about 0.6 of a percentage point off the 2013 growth rate. That's based on the amount of spending that would be cut, and a 'multiplier' around one. Now, when the economy is struggling to make 2 percent growth, losing about 0.6 percent is hardly welcome. But it's not a recession. The possible downside, and the hardest part to figure out, is how badly the sequester will dent confidence—creating the feeling that our government is losing its mind—and what that might do to spending. I've estimated that as negligible—and I hope that's right!" — Alan Blinder, professor of economics and public affairs at Princeton University

It's time America got a taste of austerity.

"Predicting the directional impact of the sequester depends on what you assume would happen otherwise. If the alternative to the sequester includes even larger budget deficits, then I say it is time for Americans to taste a little austerity of their own for a change. It is better for economic growth to reduce consumption in the short run if it produces lower deficits and, hence, more certainty about future taxes facing the job producers who are being asked to make risky investments today. Of course, if the alternative were a rational reduction in the growth of entitlement spending—the main driver of the long-term deficits—then the sequester is negative. I don't see any evidence that the White House is willing to have a serious discussion about entitlements, however." — Kent Smetters, professor of business economics and public policy, University of Pennsylvania's Wharton School

It's not just sequester's fault.

"The cuts, partly because of their bluntness and sudden implementation, will have a negative effect because they will hit hard on employment and certain types of spending… But I don't want to lay this just on the sequester, we are already cutting back on military spending, we are hiring fewer soldiers, we are raising taxes, we're encouraging employed and able-bodied people to retire early—we are already doing things that have a dampening effect on the economy... By itself, I don't think the sequester is going to lead to a recession, but it certainly dampens growth.  By the same token, failure to deal with the longer-term budget may have even more negative long-term effects." — Eugene Steuerle, senior fellow at the Urban Institute

The media is blowing this way out of proportion.

"No it won't cause a recession. Yes, it could slow growth, but long term it will have essentially zero effect. Short term it will slow down two tenths of a percentage point over a couple quarters then it will go away. We will never really know because there will be so many other things going on. The ratio of importance to print on this is amazing." — Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office.

Your question misses the point.

"I think it will reduce the growth rate. My belief is that government spending has a relatively large multiplier right now, so if we are going to cut back on spending that is going to reduce economic output and raise unemployment. As to whether that will tip us over to a recession, I don't know the answer to that, but I'm not sure whether the growth rate is positive or negative matters. Right now we need very fast growth and anything that acts as a head wind is not very helpful." — Jesse Rothstein, associate professor of economics and public policy at the University of California, Berkeley

Seriously, you're asking the wrong question.

"There is tremendous uncertainty among all these forecasts, and a negative shock on top could be enough to put us into recession. But whether this puts us into recession or not is probably the wrong question. What matters is are we doing enough to get the unemployed back to work. The sequester definitely makes that goal harder to achieve." — Justin Wolfers, professor of economics and public policy at University of Michigan

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