Remember the predictions made by Keynesian economists and pundits (from both parties, I should add) that the sequester’s reduction in government spending would deal huge damage to the economy?
Hoover Institution fellow John Cochrane catalogued them on his blog a few weeks ago:
Paul Krugman, February 22 2013, “Sequester of Fools“
“The sequester, by contrast, will probably cost “only” around 700,000 jobs.”
New York Times, Februrary 21 2013, “Why Taxes Have to Go Up““Democrats and Republicans remain at odds on how to avoid a round of budget cuts so deep and arbitrary that to allow them now could push the economy back into recession. The cuts, known as a sequester, will kick in March 1 [my emphasis]”
Paul Krugman, March 10, 2013: “Sequester Cuts Will Be Felt in Time““..it will start to build, and it won’t just be White House tours, it will be air traffic delays, …as the effects kick in, it will remind people why we actually need a government that does its job.”
Both parties often cited the work of economist Stephen Fuller of George Mason University. His reports, funded by the aerospace industry, were widely cited, and set out dire consequences for allowing the sequester, especially its defense cuts, go through.
You wouldn’t necessarily had known that you kept hearing the same study cited over and over again, but for a while it was hard to listen to the radio or watch TV without hearing Fuller’s projections. Here are some of his predictions:
According to the study of the economic impact of the 2011 Budget Control Act on the Defense Department and other federal agencies, the budget-cutting tool known as sequestration would reduce the nation’s gross domestic product by $215 billion, decrease personal earnings of the workforce by $109.4 billion, and cost the economy 2.14 million jobs — with the most severe impact coming in 2013 in what is shaping up to be a continually weak economy. Sequestration will trigger automatic cuts on Jan. 2 unless Congress can agree on an alternative savings plan.
The projections, compiled by George Mason University economist Stephen Fuller, were unveiled at a Capitol Hill news conference attended by two senators and two big-city mayors, with the lawmakers’ expressing opposing views on the key question of whether new tax revenues are needed in crafting a long-term and bipartisan deficit-reduction plan.
Defense hawks almost stopped arguing about the impact that across-the-board defense cuts could have on the military budget and national security and went all in on hyping the economic downsides to defense cuts. At the time, it really felt like the main function of the defense budget was to create jobs rather protect the nation.
I was highly skeptical of Fuller’s findings, as you can see here, and I wasn’t the only one. Last year, Harvard’s Robert Barro and I wrote a paper looking the impact of the defense sequester on the economy and job creation and found a radically different conclusion than the one the media constantly touted. The bottom line: There may be national-security reasons to oppose the defense sequester, but there’s no real reason to worry about its effect on jobs or growth.
Yesterday, the Wall Street Journal ran an op-ed by Cochrane on the broader set of predictions Keynesians have made, and how wrong they’ve been. Here is a tidbit:
Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral. Deflation would lower demand, causing more deflation, and so on.
It never happened. Zero interest rates and low inflation turn out to be quite a stable state, even in Japan. Yes, Japan is growing more slowly than one might wish, but with 3.5% unemployment and no deflationary spiral, it’s hard to blame slow growth on lack of “demand.”
Our first big stimulus fell flat, leaving Keynesians to argue that the recession would have been worse otherwise. George Washington’s doctors probably argued that if they hadn’t bled him, he would have died faster.
With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. The story is similar in the U.K.
These are only the latest failures. Keynesians forecast depression with the end of World War II spending. The U.S. got a boom. The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.