As veteran OTE’ers know, this has happened before: I’ve come to the end of my rope and can’t write about this anymore. It’s just too ridiculous to spend time analyzing this part of contemporary fiscal policy–the part where they set fiscal time bombs and then scrum around defusing them…or not–as if it makes sense. It’s nuts, and I refuse to treat it as some kind of new normal.
So, a few random observations and then I’m due back in reality.
—Economists, including myself, agree on guesstimates about the magnitude of the sequester’s impact–it’s expected to suck about half-a-point off of growth this year and cost 500,000-1 million jobs. That’s not recessionary but it means more slogging along of the type I bemoaned yesterday.
So how come on Larry Kudlow’s show last night it was one against four (about five minutes in) on this widely accepted point re the sequester’s impact on growth? To be fair, I agree that a) the sky won’t fall today–if the auto-cuts stick, their impact will be a rolling and cumulative, and b) these waters are largely uncharted–it’s hard to know precisely how the cuts will play out. But unless you’ve got a good reason to think otherwise–and I heard nothing approach reason in the segment–you’ve got to go with the arithmetic, which in this case means subtraction of an estimated $66 billion in (calendar year!) 2013 outlays.
–This leads one to think about Keynesian multipliers, and I caught a snippet of my old colleague Austan Goolsbee arguing this point with former GW Bush chief economist Michael Boskin this AM on NRP (couldn’t find clip).
Clearly, the Kudlow-crew refuses to accept this math and that’s behind their rejection of the negative growth impacts I stressed (a view that’s widely shared as the above link shows). But here’s my question: under what micro-economics do such multipliers not exist? By which I mean, there’s a furlough, a reduced defense contract, a cancelled research grant–and I don’t think even the deniers question whether some of these cutbacks will occur–and someone has less money than they otherwise would have. So they cut back on something–a meal here, a vacation there, a movie–some discretionary part of their family budget gets pinched. And this has the well established ripple effect.
Again, I’ve never heard the folks who now scoff at Keynesian analysis of times precisely like this, with large, persistent output gaps, low inflation, and interest rates at historic lows, explain why this common sense is wrong.