Federal Reserve Chairman Ben Bernanke had something to say about sequestration during his testimony before the House Banking Committee on Tuesday. He thinks the looming spending cuts could actually make it harder, not easier, to reduce the deficit. Why? They’ll hurt growth while the economy’s still weak:
The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise.
A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant.
Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.
The logic here is simple enough. The sequestration cuts will drag down economic growth this year, which will mean that fewer Americans will have jobs and less tax revenue will pour in. Nothing cures deficits like stronger economic growth. And right now, Congress’s policies are standing in the way of stronger growth.
So what’s Bernanke’s alternative? Wait a bit longer to start cutting, at least until the recovery is on firmer footing: “Congress and the Administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration* with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”
* Pedantic footnote: And, yes, Bernanke is technically correct when he says “sequestration” rather than “sequester” — the latter is typically a verb! But everyone in Washington is saying “the sequester” at this point, so who are we to stand up for proper grammar?