U.S. Economy

Please Stop Saying the Sequester Is Good for Growth


Forbes Media Chairman Steve Forbes

Photograph by Matt Rourke/AP Photo

Forbes Media Chairman Steve Forbes

It’s been almost six months since the sequester took effect. Since it hasn’t been the catastrophe that some had predicted, it has given fodder to those who argue that the U.S. can cut its way to prosperity. Take this recent Fox News segment, in which Steve Forbes argues that not only has the sequester not hurt economic growth, but that it’s actually the one thing that’s boosted gross domestic product. “That’s the one reason why we’re going to get a little bit of growth this year,” Forbes says.

The numbers show otherwise. Let’s start with the data: According to the U.S. Bureau of Economic Analysis, over the first half of 2013, the federal government has subtracted 0.8 percentage point from GDP growth—this as the economy grew a paltry 1.1 percent in the first quarter and 1.7 percent in the second.

It’s hard to know how much of that drag the sequester accounts for. We’ll never know how much the economy would have grown without those $85 billion in spending cuts. But we have a pretty good idea of what a sequester-less future would look like, at least in the near-term. Last month, the Congressional Budget Office projected that an immediate cancellation to the sequester would boost real GDP by 0.7 percent and add an extra 900,000 jobs to the economy by the third quarter of 2014. We’re living through the biggest contraction in federal spending in 60 years, and this is one of the weakest recoveries on record. Coincidence?

Forbes bases his pro-sequester argument on the notion that every dollar the government doesn’t spend stays in the pockets of the taxpayers. It’s true that private citizens are better stewards of their own money than the government. But when businesses are reluctant to invest, and households are cutting spending to rebuild their savings, we get a shortfall in demand that the government can offset by raising spending or cutting taxes. Instead we’ve gotten higher taxes and lower spending. That’s good for the deficit, terrible for economic growth.

According to the CBO, the economy is operating at 6 percent below its potential, meaning there’s about $1 trillion of slack in the economy right now. With wages stagnant and unemployment still above 7 percent, the problem isn’t overspending but not enough spending. “The idea that spending cuts generate growth in a demand-constrained economy is nonsense,” says Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities.

Other than on the set of Fox News (FOX), it’s hard to find an economist who believes the sequester is boosting GDP growth. “To say the sequester is good for the economy is wrong on a scale that’s impressive,” says Neil Dutta, chief U.S. economist at Renaissance Macro Research. “I don’t know how you can make that claim,” says Stuart Hoffman, chief economist at PNC Financial Services Group, who estimates that the sequester has stolen about 30,000 jobs from each month’s payrolls total since it was enacted in March.

We all know this is just a partisan talking point and not an economic insight. Just in case its viewers might become confused, Fox made sure to run a disclaimer at the top of the segment. “The following program contains strong opinions… that should not be relied upon as investment advice when making personal investment decisions.”

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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