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Sequestration Myth

March 12, 2013 in Economics

By Richard W. Rahn


Richard W. Rahn

The head of the Obama White House National Economic Council, Gene Sperling, who is a lawyer, has been claiming that “all economists” agree that sequestration will cost 750,000 jobs. I am an economist with a doctorate from Columbia University, and I don’t agree. The fact is that most classical and Austrian school economists also don’t agree (including many Nobel laureates), because they understand that U.S. government spending is well above the optimum for economic growth and job creation, which means that less government spending will create more jobs, not fewer.

It is true that sequestration and a reduced growth rate of government spending can cost a few jobs in the government sector, but this will be more than made up by the additional job growth in the private sector. Back in 2009, the folks in the Obama administration and their Keynesian allies in the economics profession told us that a big increase in government spending, which is what they obtained (more than 25 percent in real inflation-adjusted terms), would result in big job growth with less than 6 percent unemployment and more than 4 percent real economic growth by now.

The notion that reduced federal spending will cost jobs is nonsense.”

Instead, as shown in the accompanying table, the number of people employed in the private sector is still about 3 million less than it was six years ago, and economic growth has been running at about 2 percent since the end of the recession in 2009. The number of federal government employees is a little higher than it was in 2007, and the number of state and local government employees is slightly lower. Federal government employment peaked in 2010, in part, because it was bolstered by the temporary hiring of census workers.

The key figure is federal spending as a percentage of gross domestic product. The more the government spends, the less remains for the private sector. As the public sector grows as a percentage of GDP, then, the private sector and private jobs shrink as a percentage of GDP. Since 2010, the federal government share of GDP has been declining at a very slow rate, and private-sector jobs have been increasing at a slow rate. Sequestration will result in a small, continuing drop in the federal sector. Hence, private-sector jobs should continue to increase at a modest rate.

The Republicans should use the continuing resolution and the budget cap to force a further slowdown in the growth of government, and …read more
Source: OP-EDS

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