Economists: Sequester Would Put Damper on Economic Growth

Friday, 22 Feb 2013 08:13 AM

By Dan Weil

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If the automatic spending cuts go through as scheduled March 1, the economy will pay a price, economists say.

They estimate that the sequester would take 0.5 percentage point off gross domestic product (GDP) growth this year, The New York Times reports.

That’s not enough to start a recession, but it is enough to keep the recovery from gaining strength. Economists have forecast growth of about 2 percent for this year.

Editor's Note:
Make 2013 the Year You Pay Zero Taxes

If you put the sequester together with the tax hike approved last month, growth may dip to 1.75 percent from what could have been 3 percent this year, economists say, according to The Times.

The sequester would cut $85 billion of budget authority in the fiscal year ending Sept. 30, though it would only require an estimated $44 billion in spending cuts. That’s still about 1 percent of government spending, according to The Times.

What most irks many economists is that the budget reductions aren’t prioritized.

“It’s the nature of the cuts that is most pernicious — across-the-board, without thought, cutting everything and anything including programs everyone thinks are good and effective,” Mark Zandi, chief economist at Moody’s Analytics, tells The Times.

“It’s impossible to calculate in terms of dollars and cents what you’re doing when you have these mindless cuts,” Zandi says.

“There’s a better way to do this,” Joel Prakken, chairman of Macroeconomic Advisers, a forecasting company based in St. Louis, tells The Times.

“Even though it’s bad policy, the macro effects are small compared with going over the fiscal cliff,” he says. “That was a recession. This is a deceleration.”

Nouriel Roubini, a New York University economist, says investors are a little too blasé about the sequester. He tells Yahoo it may strip 0.7 or 0.8 percentage point off GDP growth, cause a decline in the stock market and lead to a downgrade in the U.S. credit rating.

“People underestimate the negative economic and financial effects of the sequester,” Roubini says.

“It doesn’t look like there will be a last minute deal on the sequester. … The question will be how long the sequester will last,” he adds.

Editor's Note: Make 2013 the Year You Pay Zero Taxes

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