The Sequester and the Cliff

August 7th, 2012 at 1:12 pm

The researchers at Goldman made an interesting graphic projecting the fiscal contraction from the various components of the fiscal cliff.

Source: Goldman Sachs Research

Here are what I took to be key takeaways:

–The sequester hits very hard right out of the gate in 2013.  More on that in a moment, but that’s the first thing I see here.  Recent work by Scott Lilly and various press reports stress the disruption to economic activity by the spending cuts.  What the GS analysis shows is how front-loaded they are relative to the tax expirations.

–The magnitudes are recessionary.  As the CBO has pointed out, if we go over and stay over the cliff, the US economy, which—though slogging along—has proven to be quite resilient against many a blow, could be knocked back into recession, as we’ve seen in the European applications of fiscal austerity.   On the other hand, if it takes going over briefly to get a responsible budget deal, these deep negative effects need not occur.

–We’re already in austerity mode and have been so for some time.  Note the black parts of each bar.  Including state and local budgets, fiscal policy has been contractionary since around 2010 (see figure at the end).  That makes no economic sense, but…there it is.

I’m not sure GS is right about the immediacy of the magnitude of these spending cuts on growth.  As I’ve written before, there are considerable lags built into the way money flows from the government to, say, defense contractors.  Projects they’re doing today were paid for a year or two ago.

Nevertheless, the GS researchers are  thinking about the way these dollars flow through the national accounts—as government spending which feeds into GDP—so they’ve got a point.  And even if the sequester part of that first bar is off by, say, a third, that’s still a big hit to an already too wobbly economy.

So, am I rethinking the view that the only thing worse than going over the cliff would be a full-can-kick (full extension of everything) to avoid the mess you see in these pictures?

No.

They—and I include conservative, defense-hawkish R’s—backed themselves into this corner because they’ve refused to make responsible budget choices, including a balanced deal with new revenues along with spending cuts—cuts that don’t play out like those above (once members start hammering out a real deal here, they can offset some of these cuts with new revenues and push them back while the economy’s recovering).

But make no mistake.  Dress it up any way you want—“we’ll set up a binding commission to blah, blah, blah.”  To let them out of the corner would be equivalent to setting up another super committee.

Who wants to go there?

Source: Goldman Sachs Research

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4 comments in reply to "The Sequester and the Cliff"

  1. urban legend says:

    As to cutting Social Security and Medicare benefits by raising the eligibility age, it’s hard to exaggerate how cruel and indecent such suggestions are. Under employment conditions for at least a decade, people who lose their jobs in their 50s or 60s basically do not find jobs ever again. When unemployment in the 65-69 age group has been under four or five per cent for about 10 years, come and talk to us. Before then, and I don’t give a crap what you are CEO of, you should sit down and shut up.


    • Fred Donaldson says:

      Since members of Congress are permitted to retire in many cases at age 55 AND receive SS benefits as though they were 62, and at 62 those benefits then come out of regular SS funds, not a special fund, it would seem reasonable to increase the eligibility age for the serfs to allow early benefits for the lords and masters.

      http://www.senate.gov/reference/resources/pdf/RL30631.pdf

      And who needs SS if you already have a few million in the bank – earning 5%? Average SS benefit is $14,000 a year, and $2.8 million in the bank yields ten times the average SS benefit, let alone $28 million or $280 million, holdings like some of our finest feathered friends, who tell us to cut back on our catfood purchases and practice “austerity.”


  2. Rima Regas says:

    I can make some anecdotal observations based on what’s happened to some of my engineer friends who’ve lost jobs or whose jobs are still in question at Defense contractors. The cuts were immediate at the start of the Great Recession – at least here in California – and they’ve never really stopped cutting, whether it is by moving and consolidating operations, killing programs, shedding employees, restructuring the workforce and having employees compete for projects within the company as a condition of continued employment, etc. My guess, based on what I’ve seen happen on the ground, here in CA, is that they would act immediately to shrink even more.

    When thinking about states, take California again, when we know that they were counting on income that won’t materialize ($1.2 billion from Facebook) due to fantasy income projections, you have to wonder how much of a lag there will really be this time around, when the budget will crash much sooner than the Cliff, due to other reasons.

    Jared, would another round of stimulus avert a disaster, if the Dems regain Congress and some red states turn blue? How big would it need to be in order to be effective?


  3. bambi says:

    The 99% lower income group seems to believe reductions in federal spending (aka “austerity”) magically will stimulate economic growth, and that Social Security, Medicare and Medicaid benefits, which put spending money directly into consumers’ pockets, somehow reduce economic growth. And, military spending, which pays soldiers’ salaries, and pays thousands of military suppliers to employ millions of Americans, magically increases unemployment.

    The 99% believes the federal government should spend less – Less to build and repair our roads, bridges and dams. Less to inspect our food and our medicines. Less to inspect banks and financial brokers. Less to defend America against enemy nations and terrorists.

    Less to catch and imprison criminals. Less to create and monitor patents and copyrights. Less to help victims of floods, hurricanes, fires, tornados and earthquakes. Less to pay for our courts. Less to pay for educational services. Less to protect our bank deposits. Less for the Library of Congress and federally supported museums.

    Less for disease prevention/cure, research and development. Less for occupational safety. Less for science. Less to preserve national parks. Less airplane control

    The list goes on and on. The Tea/Republicans demand “less government.” The media demand a reduction in the federal “deficit.” They tell the 99% this all somehow can be accomplished with “less waste” or some other pie-in-the-sky mantra and the 99% parrot what the media and politicians tell them, not realizing they are demanding to commit economic suicide.

    Greece’s awful experience with austerity matches Italy’s, France’s, Ireland’s and the UK’s. So is the problem one of mere stupidity, or is something else at work?


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