Over at Neighborhood Effects, James Broughel asks the question, “Has the Sequester Hurt the Economy?”
So have the sequester cuts hurt the economy? One possible answer comes from a new paper by Scott Sumner of Bentley University. Sumner argues that cuts to government spending don’t have serious deleterious macroeconomic effects when the Federal Reserve is targeting inflation. This is because the Fed ensures that prices stay stable under an inflation targeting regime, which keeps demand stable even in the face of government spending cuts. Similarly, when the Fed stabilizes the price level it also offsets any beneficial effects that fiscal stimulus might have, which helps explain the lackluster results from the 2009 American Recovery and Reinvestment Act (aka the “stimulus”).
Implicit in Sumner’s theory is that expansionary austerity, or the idea that the economy can grow even in the face of large government spending cuts, is indeed possible. Some of my colleagues at the Mercatus Center have described other ways in which expansionary austerity is possible.
First of all, I would like to be clear that I do not disagree that “expansionary austerity” may be possible. Nor do I disagree that the sequester cuts have not significantly hurt the economy. However, while the sequester included spending cuts and, therefore, technically qualifies as “austerity,” it was not what everyone was making it out to be.
As I wrote back in March,
the apocalyptic portrayal of the sequester cuts, sometimes on entirely fictional grounds, does not reflect the cool and free exercise of reason. The cuts amounted to about $85 billion, approximately 8 percent of the roughly $1 trillion deficits the federal government has run up each of the last five years. In reality, these cuts are far from draconian, and it will take much more to get our spending under control.
Now, no doubt some of the shock from the sequester cuts has been absorbed by federal monetary policy. But perhaps the expected shock simply wasn’t a shock at all (more like a spark or flicker, really). A recent estimate has the deficit for FY2013 at $753 billion as of August. That would be an improvement over $1 trillion, but it is still astronomically high. As I wrote in March, these cuts were “far from draconian.”
I suppose I’ll be happy if people start to think from this that spending cuts are not the second horseman of the Apocalypse, but we’ve got more work to do. In particular, everyone but the state has more work to do. Families, churches, communities, businesses, non-profits, bridge clubs, student associations, LARPing circles — everyone needs to take more time to look around themselves and continually ask the question, “Is there something we can do ourselves to help people in need?”
The state still needs to do less with less at this point.