A Sequester falls on Chicken Little's Noggin

Not since that acorn fell on Chicken Little's head has impending doom been more exaggerated.

If there is a sequester it will really be only $44 billion in reduced spending this year. The $85 billion is a bogus number $41 billion of which will be cut in future years but which the government (the people who are $16.6 trillion in debt) has a mystic way of accounting for that $41 billion happening in future years as if it is happening now.

GDP in 4thQ2012 was $13.647 trillion or $13647 billion. The sequester mandated reduction in government spending in the current calendar year is almost exactly 3/10'ths of 1% of GDP. A good question then is: what is a drop of 3/10 of 1% of GDP in government spending likely to do? Has such a traumatic event ever occurred before? In fact, yes.

In 8 of the 9 last quarters government spending as a percent of GDP has dropped (I am talking on all levels not just Federal). In 6 of those 9 quarters it has dropped more than 3/10's of 1% of GDP. In 5 of those 9 quarters it has dropped by more than twice that 0.3%.

The following are the last 16 changes to government spending as a percent of GDP.

 

Quarter	GDP Change
	from Government Spending
4th Q 2012	-1.38%
3rd Q 2012	0.75%
2nd Q 2012	-0.14%
1st Q 2012	-0.60%
4th Q 2011	-0.43%
3rd Q 2011	-0.60%
2nd Q 2011	-0.16%
1st Q 2011	-1.49%
4th Q 2010	-0.94%
3rd Q 2010	-0.06%
2nd Q 2010	0.59%
1st Q 2010	-0.69%
4th Q 2009	0.23%
3rd Q 2009	0.79%
2nd Q 2009	1.94%
1st Q 2009	0.37%

 

The fiscal effect of the sequester is, over the next year, no different from what has already been happening regularly. I am not implying that reduced government spending will not impact GDP. It will. But the extent of the hurt is nothing proximate to claims made by the Administration.

The fact is that the economy is continuing to grow an a snail's pace and growth in Federal debt remains massive. A plan for fiscal sustainability is necessary. If this "drop in the bucket" cut to Federal spending is meeting this much resistance than there may appear to be no real hope for fiscal sustainability until disaster has already occurred.

I am someone who is rarely without hope. My personal hope is that the sequester happens, the effects are judged to be near zero and folks realize that government spending - which is now out of control - can be reeled in without significant damage to the economy.