Sequester Impact Small, Says Stanford Professor: Chart

Sequestration Impact ‘Very Small,’ Says Taylor
A U.S. flag flies above naval vessels docked at the Norfolk Naval Shipyard in Norfolk, Virginia, on Feb. 28, 2013. Photographer: Joshua Roberts/Bloomberg

March 1 (Bloomberg) -- Automatic spending cuts that are scheduled to begin today will have a “very small” impact on the U.S. economy, according to John Taylor, an economics professor at Stanford University in California.

The CHART OF THE DAY shows the difference in federal spending with and without the reductions, known as sequestration, will be $42 billion in the fiscal year ending in September 2013, or 0.26 percent of gross domestic product, according to data provided by Taylor, who was Treasury Under Secretary for International Affairs from 2001 to 2005 under President George W. Bush.

The Senate rejected a pair of partisan proposals yesterday to replace this year’s across-the-board cuts, and no additional action is planned to ward off the reductions. Without an agreement, $1.2 trillion of budget cuts will be evenly divided over the next nine years between defense and domestic expenditures.

“I think the overall macro impact will be very small, and, if we cave on this, it could be counter-productive,” said Taylor, best known for his rule that points to the optimal level for interest rates. “It’s best to stick to the overall sequester amount, and at the same time, find a way that government agencies, working with Congress, can do this in a more sensible way.”

President Barack Obama said on Feb. 25 that “uncertainty” over the cuts “is already having an effect.” The administration has pointed to longer lines at airports, closed portions of national parks and fewer meat inspectors as examples of consequences if the cuts go through.

To contact the reporters on this story: Ilan Kolet in Ottawa at ikolet@bloomberg.net; Max Raskin in New York at mraskin5@bloomberg.net.

To contact the editor responsible for this story: Alexandre Tanzi at atanzi@bloomberg.net.