Tags: Tyson | sequester | GDP | spending

Ex-White House Economist: Sequester to Slash GDP Growth, Cause Loss of 1 Million Jobs

Tuesday, 26 Feb 2013 07:53 AM

By Michael Kling

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The approaching automatic budget cuts will cut at least 0.5 percentage point from gross domestic product (GDP) growth and prompt the loss of at least a million jobs, warns Laura Tyson, former chairman of the President’s Council of Economic Advisors.

In all, the cuts plus the new tax increases will knock about 1.25 percentage points off this year’s GDP growth, she writes in an article for Project Syndicate.

Automatic across-the-board spending cuts, known as the sequester, will cut spending by $85 billion this year, and by similar amounts every year through 2021.

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Sequester advocates want a smaller government and argue that government spending is chocking economic growth.

“Although it’s a politically compelling argument, because it stokes public fears about an out-of-control deficit, it flies in the face of the facts,” Tyson, a business professor at the University of California, Berkeley, writes.

Too little government spending, not too much, is the problem, she argues, citing a Congressional Budget Office that says larges cuts by state and local governments have substantially contributed to weak demand.

Since the year after the recession ended, government spending has shrunk, putting a drag on recovery. Federal spending has been declining since 2010, when the stimulus ended.

Even without the sequester, the budget deficit is expected to fall faster in the next two years than any two-year period since World War II, she asserts.

The economy continues to operate below capacity in a tremendous waste in potential represented by the current 7.9 percent unemployment rate, she states.

“And the waste accumulates over time: the longer the economy operates far below its capacity, the slower the growth in its future capacity as a result of diminished risk-taking, foregone investment and erosion of the skills base.”

The across-the-board spending cuts don’t distinguish between effective and ineffective programs and will probably inflict more economic damage than targeted cuts of the same size.

“The sequester is the product of ideology and political stalemate. It has no economic justification,” she writes.

The sequester is widely criticized, but politicians seem more interested in blaming each other for it than preventing it, Len Burman, co-author of “Taxes in America: What Everyone Needs to Know,” writes in an article for Forbes.

“No sensible person of either party thinks sequestration is a smart way to run a government.”

The best option would be to cancel the sequester and extend the payroll tax cut for at least another year. In addition, the administration should submit a plan to slow healthcare and entitlement spending.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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