Benjamin Studebaker

I haven’t been doing much writing about the US economy lately, in part because there’s been no substantive movement on the issue politically since sequestration went through. All we’ve gotten lately are some retread hopey changey speeches from Obama and threats of future government shutdowns from congressional republicans. Nonetheless, these are the first signs that we will soon be having more unproductive fights about the economy with potentially devastating consequences for growth, so I’ve been keeping my eyes peeled. And, lo and behold, I stumbled on a little poll from Gallup.

What does the poll say? Only about 30% of Americans have any clue what sequestration is and what it is doing:

That’s right, 54% of Americans freely admit to having no idea what sequestration does, and 15% actually think it’s a good thing. Given how many Americans don’t know what sequestration is, I suppose I ought to explain it before proceeding further.

Sequestration consists of about $78 billion in spending cuts.  Here’s how sequestration happened:

1. In April 2011, congress decided to start a fight over the debt ceiling.
2. In August 2011 instead of  using the 14th Amendment or minting the coin, Obama makes a deal and signs the Budget Control Act of 2011, which creates a fiscal cliff if there is no “grand bargain” on the budget before the end of 2012.
3. In Summer and Fall of 2012, everyone starts to notice that the fiscal cliff would plunge the country back into recession (an admission that implied some agreement with the Keynesian point of view).
4. In December 2012 Obama cuts another deal whereby he eliminates most of the planned austerity, but not all of it–the payroll tax holiday ends, some of the spending caps inflicted by the budget control act remain on the books, the taxes of the rich go up, some Obamacare taxes come on the books, and the budget sequestration is delayed but not cancelled.
5. In February 2013, sequestration’s delay proved ephemeral–it was added to the austerity planned for 2013.

$78 billion is not a huge piece of the economy. All told, the sequester is a reduction in state spending of about 0.5% of GDP. The IMF’s multiplier for economies operating well below potential is about 1.7, so sequestration should be reducing our growth rate this year by 0.8%. How are the figures looking so far?

That 0.1% growth quarter at the end of 2012 was an aberration due to investor nervousness about the fiscal cliff. It’s those last two quarters, the 1.1% and the 1.7% quarters, in which we might reasonably expect to see some effect from sequestration.  Sure enough, both quarters are slightly below average for the post-2010 period. Sequestration is not devastating in the way full blow fiscal cliff would have been–it’s too small for that–it just slows us down a little bit, stretching out that misery just a little more. There are, of course, other factors in play as well, but so far 2013 has very clearly been a weaker year for growth than either 2010, 2011, or 2012.

The unemployment numbers have improved slightly this year, about half a point:

However, much of this is due to workers giving up on finding employment altogether–the unemployment numbers do not include all working age people who don’t have jobs, they only include working age people who don’t have jobs but are still looking for them. If we look at the employment-population ratio (data from the BLS), the percentage of the working age population that is employed, we see that there’s still a very long way to go to recover from the economic crisis in 2008:

We’re about a quarter of a point better than we were in 2010, but we still have about 4 full points to make up. The employment picture remains inescapably grim. Even the employment-population ratio doesn’t include under-employed people, those who have jobs but are not working up to their full potential (e.g. recent college graduates in part-time jobs). All of this implies a continuing significant output gap–the economy is operating below potential. We could be producing more, but we’re not, because the demand isn’t there–we’re still deleveraging, trying to extricate ourselves from the massive pile of household debt we built up pre-08. Household debts remain larger than US GDP:

All of this isn’t perhaps as entertaining for the average American as The Real Housewives of Who Gives a Shit, but it’s nonetheless important. Sequestration contributes in a measurable way to the amount of avoidable suffering Americans experience. 70% of Americans either do not know what sequestration is or think it’s beneficial to them. This would not be a problem if Americans entrusted their economy to those who know something about how one ought to be operated, but Americans continue to vote based on what economic knowledge they have, and what economic knowledge they have seems to be quite insubstantial. We have been unable to choose any kind of comprehensive set of policies to confront the economy in no small part because Americans continue to vote for a congress and president that mutually cripple one another, neither of which seem to themselves know very much about running an economy.

Would it not pose quite a problem if 70% of doctors were either “unsure” about the effects of leeching or believed it beneficial? The politicians we elect reflect the epistemic skills of those electing them. Where the latter is deficient, the former will be as well. Amazingly, this output gap has been running since I was a sophomore in high school. I’m now a grad student. Voters and politicians do not seem capable of learning.