July 15, 2013
Has the Government Spending Sequestration Hurt the Economy?
Has the Government Spending Sequestration Hurt the Economy? Becker
The so-called "sequester" cuts in federal spending mandated by the Budget Control Act of 2011 went into effect March 1. In the print media, the blogosphere, and even among respectable analysts, there was widespread apprehension and even alarm about the effects of these cuts on the poor, on government services, and perhaps especially on the economy. Although 4 1/2 months after the start of these cuts is still too early to give a full or authoritative evaluation of their effects, it is not apparent that the cuts implemented so far have had a noticeable effect on the overall performance of the economy.
The mandated cuts amount to only $85 billion in fiscal 2013, but similar cuts are supposed to occur in 2014 and every future year until 2021. The cuts are split evenly in dollar amounts between defense and non-defense sectors, and Medicaid, Social Security, and a few small categories are exempt. The cuts are supposed to be equal in percentage terms in the various categories of federal spending that are affected. The cuts in 2013 are only about 2.3% of total federal spending in this year, although they are much bigger percentages of some discretionary spending categories.
Most of the concern about the effects of the cuts in federal spending and employment on the performance of the American economy stems from an implicit assumption that there would be no offsetting adjustments in the rest of the economy, particularly in the private sector. Yet federal government employees laid off due to the sequester will naturally seek jobs in the private sector, or in state and local government. Although it is still early to detect with confidence the effects on private employment, the changes in both government and private employment since January 2008 are telling. According to data from the Bureau of Labor Statistics published in The New York Times this week, overall government employment, including state and local as well as federal employment, rose by about 3% during the heart of the financial crisis from 2008 to 2010. Since then, it has fallen by 5%, so that government employment is 2,4% below its level at the beginning of 2008. The reason for the fall in employment since 2010 is cutbacks in federal and state and local spending due to tighter budget restrictions on hiring.
Changes in private sector employment are almost the mirror image of what happened in the public sector. Private employment fell by 10% for men and 5% for women until the beginning of 2010, and it has risen by about 7% for men and a little over 5% for women since then. The growth in private employment much more than compensated for the fall in government employment in the last 2 1/2 years, with the result that total employment grew and total unemployment fell, despite the sharp fall in government employment.
Similar changes have taken place during the past several months after the sequester cuts began to affect government employment. Private employment has been growing by about 200,000 workers per month. This is high enough to nudge the unemployment rate down and the employment rate up, although unemployment is still much too high and employment much too low relative to what full employment would look like. During this recent period, federal government employment has been falling by about 5,000 workers per month, so clearly the growth in private employment has swamped the decline in federal government employment. The result has been that total employment has been growing by an amount close to the growth in private employment.
The prestigious Congressional Budget Office predicted that the sequester cuts would reduce overall employment by about 750,000 jobs in 2013, and lower the growth rate of GDP by 0.6 percentage points, which is about equal to the $85 billion cuts mandated by the sequester act. Clearly, this forecast and others in the media are implicitly assuming no offsetting growth in private output and employment.
More detailed studies of separate sectors with longer time series are necessary to determine the causative relation, if any, between the actual growth in private sector and the decline in public sector employment during this year, and since 2010. Nevertheless, one can definitely conclude that the predicted large effects on the overall performance of the economy from the sequester cuts in federal spending have not happened. The evidence available is suggestive that compensating changes in private employment more than offset the effects of the sequester on federal government employment.
The Sequester Is a Failure—Posner
Becker is certainly correct that the sequester has had less of an adverse effect on the economy than was predicted. But it has failed, thus far, because the object was to frighten Congress and the President into agreeing to sensible fiscal reforms that would keep the federal deficit within tolerable limits. Because the sequester has had only modest economic effects (in part because some of its most onerous provisions were quickly modified), the pressure on the politicians that it was supposed to exert has lifted.
So it hasn't had the good effect that was predicted, but it has had bad effects. It has slowed the economic recovery, even if not dramatically (yet it may be too soon to tell). It is true as Becker points out that employment has continued to grow, despite the sequester, but it would have grown faster without it. The sequester has caused substantial layoffs both of federal employees and of employees of companies in the defense industry, which are dependent on federal financing that the sequester has slashed. Not all the laid-off employees have found equivalent jobs in state or local government or the private sector. (It is not like the aftermath of World War II, where the millions of soldiers released back into the civilian sector quickly found jobs—they were returning to the jobs they had held before being drafted, or to jobs opened up by massive conversion of military to civilian production.) Moreover, many federal employees not laid off have been furloughed without pay for several days a month, reducing their income and hence their spending. And slashes in a number of programs intended to assist the poor and semi-poor, programs such as Head Start and Meals on Wheels, have to have reduced consumer spending. As Keynes pointed out, consumption drives production, which drives employment. And to the extent the sequester had further increased the marked and growing inequality of income and wealth in America, it has done further harm to the country.
And the sequester is only in its fifth month. Pursuant to the Biblical injunction "sufficient unto the day is the evil thereof," federal agencies have been ingenious in delaying the full effects of the sequester by drawing on reserve funds. As these funds become exhausted, layoffs and furloughs will increase.
I am also troubled by the potential effect on the military of the reduction in its funding decreed by the sequester statute. Of course we shall continue to have by far the world's largest military budget even after the full effect of the sequester has been experienced, and no doubt that budget contains plenty of waste. But cutting the budget of a government agency is not an effective method of cutting waste, because agencies are not in competitive markets, where failure to achieve efficiency invites takeover or bankruptcy. Politics determines what programs are terminated or shrunk in response to a reduction in the agency's budget.
Because of the extreme instability of much of the world, the threat to the United States posed by hostile countries such as Iran and North Korea, the incipient threat posed by China's chauvinistic foreign policy, the extraordinarily rapid technological advances in menacing domains such as cyber warfare, and the continued threat of international terrorism, the United States confronts a formidable array of national security problems. Arbitrary cuts in overall national security spending, at such a time, are reckless.
The Administration seems not to have managed the sequester intelligently. The only possible benefit of the sequester was as I said to frighten Congress into addressing the federal deficit intelligently. For that benefit to be realized the sequester had to hurt. But the Administration quickly backed off from sequester measures that would have hurt, such as laying off air controllers. By making the sequester seem innocuous, the Administration played into the hands of Republicans who want to shrink the federal government regardless of adverse consequences and now are crowing that federal expenditures can be significantly reduced, even by meat-ax methods, without visible adverse consequences. There are adverse consequences to the sequester, and they will probably increase as agency reserve funds are depleted, but they are as yet invisible to most Americans.
One sees a repetition here of one of the biggest blunders in the early days of the Obama Administration (in fact a few weeks before Obama's inauguration), when Christina Romer, the incoming chairman of the Council of Economic Advisers, predicted that the stimulus the Administration intended to request Congress to enact would reduce the unemployment rate from 8.2 percent to 7 percent by the fourth quarter of 2009. The stimulus was enacted but the unemployment rose to 10 percent by the end of the year, allowing Republicans to argue that the stimulus had had no effect on unemployment, though most economists believe that it kept the unemployment rate from rising even farther. At least the Administration that time did not take affirmative steps to falsify its own predictions, as it did this time by weakening the sequester's bite, thus making cuts in federal spending seem costless to society.