posted March 3, 2013
SEQUESTRATION AND OBAMA’S MISTAKES

Conversation with Jack Rasmus, political economist and author of “Obama’s Economy: Recovery for the Few? among other books, about the sequestration, those $85 million in automatic spending cuts that went into effect today

SUCHANSKY: Jack, thank you so much for coming back on the program.

RASMUS: My pleasure.

SUCHANSKY: Absolutely my pleasure! So, a lot of people are talking about the impact that this is going to have, particularly the economic impact. And it seems that a lot of people think that this really is not that big of a deal. Surely we might see delays awaiting for our tax returns, there may be some furloughs for government employees and so on. Is this going to impact the rest of us?

RASMUS: Well, I think we may be underestimating the impact because it’s not just the dollar value here, it is the impact on a consumer and business confidence and it is going to play a role as well. And the economy is in a very-very fragile state right now. As you know last quarter it pretty much flattened out, the fourth quarter of 2012. And the question of whether it will robustly snap back from that very fragile situation of last year - some say it was a one-time aberration because the government spending collapsed and inventories collapsed and therefore they will snap back.

But if you look elsewhere, consumer spending and confidence, except for auto and apartment spending, looks very fragile. And we won’t know until the end of March whether the first quarter is another very weak quarter. And remember, we always underestimate the decline in GDP because we underestimate the inflation, and therefore real GDP is larger. So actually we had negative last quarter, and if the IMF and others are correct that this could have a 0.5% impact on the economy, then we may come in another almost flat quarter here.

So, I am not too convinced that this will have no effect, because this is not just a dollar-dollar effect, it is accumulative psychological effect on the economy. And talking about spending, the multipliers are larger for spending then they are for tax cuts. The Bush cuts didn’t stimulate the economy much, therefore when we took a little bit out of them on January 1, only $60 billion, it didn’t have much impact. But the payroll tax cut elimination did have a big impact. So, carrying through this first quarter, I’m not so sure this may not have a cumulative impact on the economy and keep us at a flat growth rate here.

SUCHANSKY: At the very least the stock market doesn’t seem to be worrying very much at all, right? Does that mean anything?

RASMUS: The stock market follows the Federal Reserve and quantitative easing. If you remember, about a week ago the Fed minutes from its last meeting were reported and it looked like they may end QE or slow it down, and the stock market took a huge dive in a couple of days. And quickly the Fed rolled out its governors and they said – no, we are not really meaning that, and the stock market took off again. So the stock market is really keen after the free money from the Federal Reserve, the quantitative easing and whether that will continue. And all the indications are that it will.

On January 1 we had the Bush tax cuts expiring and the payroll tax cuts. That would have saved the Government over the next decade, if we just let them expire, $4.6 trillion. Because we only got $60 billion, $4 trillion are going to be added the deficit and the debt over the next decade. And I believe a big error was made by Obama and they are making another error right now.

What Obama should have done on January 1, was let it to go over the first fiscal tax cliff, and then reintroduce a middle-class tax cut only. But instead the Democrats and Obama just grabbed that miniscule $60 billion and settled the tax issue and allowed the Republicans to say – ok, now it’s only spending that we are going to talk about. And of course the sequester that just happened was a spending only bill.

So what happened is that the Republicans have flipped the whole strategy and have done what Obama should have and didn’t do on January 1. That is – they are allowing the defense cuts to go through, and Obama and the Democrats thought that they would never do that. Yes, they are allowing it to go through but in a few days or weeks they will turn around and put bills in Congress to restore the defense cuts only. So, what will be left is just spending cuts, which is what they want.

The economy is a psychological thing. You can’t just look at the numbers, dollar to dollar. What people perceive happening has an impact on their economic behavior. And I’m not so sanguine on the future prospects for consumption over the next six months with falling real disposable income going on, and now we’ve got rising gasoline prices and still have runaway healthcare costs etc, the impact on the average consumer is greater than people think.

SUCHANSKY: And also this is not helping to create those jobs, the jobs that everybody says we want to be creating in order to get us back to pre-crash levels of unemployment and so on. And I have to imagine this is going to seriously hurt that effort.

RASMUS: Yes, I think it does anything for job recovery. And you know, we have created 5 million jobs as the hype but if you look at it what do with those jobs pay, there was a recent study that was done, that showed that 60% of the jobs we lost since 2008 there are high-paying jobs, in other words $18 in hour and above. And 58% of the jobs we have created, these 5 million jobs that everyone is making this big hullabaloo about, are the various low-paying jobs between $7 and $13 in hour.
In the last quarter we had a big surge in credit, once again spending by consumers. You can’t keep that up. And consumers are still dragging their money out of their savings to finance spending. That’s not a long term sustainable situation. That’s why I predicted in my book “Obama’s Economy? and my prior book “Epic Recession? that we will not get a robust recovery, we are going to bounce along the bottom this growth rates between 0-1%. Sometimes we go up to 2%, sometimes we go are down to 0%. And that’s not really a real recovery, and that’s not enough to really do something about the labour markets.

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