Bernanke: Sequester Cuts Will Lower GDP, Make Deficit Reduction Harder

Ben Bernanke:

The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise.

A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant.

Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

Comments

  1. Jack Contado says:

    that’s typical “1984″ Lib logic: if we spend less, the deficit will go up.

    Benake said it, it must be true

    • Jon Geeting says:

      If there’s less nominal spending, growth will slow. If growth slows, the deficit will go up. Learn some macoeconomics.

  2. Jack Contado says:

    thanks for clarifying. Why don’t we borrow and spend 100 trillion dollars right now? Then the sky would be the limit on growth…….

    • Jon Geeting says:

      That would be a bad idea since we’d obviously run up against our real capacity to produce, and just cause inflation. I’d support borrowing $2 trillion or so though.

  3. Jack Contado says:

    can you share with us your source for the calculation that says $2 trillion is ok, at 2.1 trillion, do we run up against our real capaicty to produce?

    • Jon Geeting says:

      It’s all publicly available information. Look up NGDP. We’re still about $2 trillion below the pre-recession NGDP level. So that’s about what it would take for us to catch up to our pre-recession level. I don’t know what our productive capacity at this point is. I’d expect the full employment rate to be somewhere around a 94-95% – a little higher than usual due to hysteresis. Meaning, we could spend a lot more to bring the unemployment rate down without causing abnormal inflation, which I’d define as higher than 4%.

  4. Jack Contado says:

    and because you have demonstrated that you are a power plant of an economic analyst, perhaps you can answer a question that I have been pondering.
    In the post war 1940′s, black teenage unemployment was actually lower than white teenage unemployment ; today, black teenage unemployment is 40% vs 20% for white teenagers. Can you explain the difference? Republican racism?

    • Jon Geeting says:

      Sure, the most marginal members of society (black teenage boys) are the first to get locked out of the labor market when economic policymakers let the economy go slack. When we have full employment (check out the rate for 98-00), employers are more likely to want to hire and train them. Full employment was great for black teenagers in the late nineties. Retail businesses in the suburbs would send vans into the inner city to pick up kids for work, they’d pay for child care for young moms, they’d train people with just a GED. We need to get back to a tight tight labor market like that if we want to pull in the people who employers traditionally do not want to hire.

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