01.29.13 3:44 PM ET
Don't Do it, Congress!
AEI's John Makin warns - with charts and abundant evidence - against sequestration.
Congress and the president need to avoid excessive austerity with respect to changes in fiscal policy this year. Over the past four years, on average, the fiscal boost applied to the American economy has been worth about 3 percent of GDP. This year, with tax increases and sequestration, fiscal drag will be about 1.5 percent of GDP.
That huge 4.5 percent of GDP collapse in fiscal thrust is virtually unprecedented, especially coming as it does when the US economy has been growing at a tepid 1.9 percent rate over the past four years with the help of highly expansionary fiscal and monetary policy. What will growth be with fiscal drag at 1.5 percent of GDP, as is currently the case? We could see an abrupt halt of growth or even negative growth if fiscal remedies are applied too abruptly, especially with the Fed unable to offer additional help with another round of quantitative easing.
The lessons from Europe and Japan are that austerity, per se, is not the way to move to a sustainable fiscal stance. Rather, the US economy needs a combination of tax reform to boost growth and legislation enacted now to stabilize the future growth of outlays on entitlement programs.