Sequester Is ‘Speed Bump’ for Economy, Princeton’s Blinder Says

U.S. budget cuts scheduled for March 1 are “small beer” compared with challenges faced earlier this year, including the so-called fiscal cliff, according to Princeton University economics professor Alan Blinder.

“This is a speed bump,” Blinder, Federal Reserve Vice Chairman from 1994 until 1996, said today at a Council on Foreign Relations conference in New York. “The main reason I’m not so worried about it is I spent so much time worrying first about the fiscal cliff, and then about defaulting on the national debt.”

If Congress doesn’t act before the March 1 deadline, federal spending will be reduced by $85 billion in the final seven months of this fiscal year ending Sept. 30 and by $1.2 trillion over the next nine years. The cuts, known as the sequester, would slice growth in gross domestic product by 0.6 percent while costing 750,000 jobs, according to the non-partisan Congressional Budget Office.

“If you’re focused on quarter-to-quarter GDP, then you should worry about it, because it could knock enough off of GDP to round us down to zero again,” Peter Fisher, senior managing director at New York-based BlackRock Inc., the world’s largest money manager, said at the conference. “I regret that we’re focused quarter by quarter. It’s not a big share of GDP over a five-year horizon, so if you want to be short-run focused, be worried. If you want to be five-year focused, not so worried.”

‘Fiscal Path’

GDP unexpectedly shrank in the fourth quarter on a plunge in defense spending, logging the worst performance since the second quarter of 2009, the last time the world’s largest economy was in the recession. The Fed has sought to prop up asset prices and drive down unemployment mired at more than 7 percent since December 2008 by buying government securities.

“The Pentagon sneezed, and we got effectively zero GDP growth,” Fisher said. “What the Fed was worried about in September was, gee, the fiscal path is really uncertain and, who knows, we could stall out.”

U.S. lawmakers passed a bill last year averting more than $600 billion in spending cuts and tax increases, known as the fiscal cliff. Congress also agreed to suspend the $16.4 trillion debt ceiling until May 19 to prevent a default.

The cliff and borrowing ceiling issues “were concrete barriers that the car was running 80 miles-an-hour and heading for,” said Blinder, who wrote “After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead.” “It was going to be very ugly. One of them is still alive, by the way, the debt-ceiling crash. I think it’s not going to happen, but it’s still sitting there.”

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