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November 6, 2013

Did the Sequester Hurt the Economy?

 
Remember all that “the sky is falling” rhetoric we heard from the Government Class about how the economy would be devastated by federal spending restraints that automatically came into effect as a result of the sequester? Well, let me help you remember:
  • Last February 9, President Obama warned that the sequester could be a “huge blow . . . to our economy as a whole,” and that “all our economic progress could be at risk.”
  • “Sequester will Sock a Vulnerable Economy,” screamed the Washington Post last February 26, quoting Ian Shepherdson, chief economist for Pantheon Macroeconomic Advisers, as saying “The danger is real, and markets are still, in our view, much too relaxed about the possible extent of the damage.”
  • On March 8 Alan Krueger, then chairman of the White House Council of Economic Advisors, told Marketplace Radio that the sequester would reduce job growth by 750,000 jobs by the end of the year.
  • Then, on July 25, after the sequester had been in effect for five months, Senate Majority Leader Harry Reid claimed on the Senate floor that “We have learned that the sequestration already has cut 1.6 million jobs.” (He got a Four Pinocchios rating from the Washington Post’s Fact Checker for that whopper.)
  • And of course there were all the president’s dire warnings about food inspectors, air traffic controllers and firefighters being furloughed or laid off, the disabled not receiving their benefits, aircraft carriers stuck in port and cancer research being scaled back.
But what actually happened?

Well, the economy has added about 1 million new jobs over the period during which the sequester was supposed to cost 750,000 jobs (or 1.6 million, if you believed Harry Reid).

In fact, Nobel Prize-winning economist Gary Becker observed that private sector job growth has more than compensated for public sector job losses, which means the effort that formerly went toward hobbling the private sector is now being productively put to work in the private sector.

And, in the second quarter of 2013, the first full quarter after the sequester, the economy grew at 1.7 percent—well above the 1 percent predicted growth rate.

Now, that’s not nearly fast enough, and the economy won’t grow adequately until we implement policies that raise the after-tax rate of return on capital and thus encourage investors and businesses to start investing again.

But the fact is that the sky didn’t fall, job creation picked up instead of slowing down, and in the process we’ve managed to begin restraining federal spending, which has reduced our federal debt as a percentage of GDP from 10.2 percent to a projected 4 percent. And that’s a good thing.

So what should be our attitude toward the next round of sequester spending restraints, scheduled to kick in on January 1?

Bring ‘em on!

 

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