Austerity's in the Eye of the Beholder

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If you think the politics of sequestration were bad, just wait until the political economists weigh in on the results.

Whether austerity -- the $85 billion of across-the-board discretionary spending cuts, about half of which will be implemented in fiscal 2013 -- hurts or helps the economy will be in the eye, and the political disposition, of the beholder.

What do I mean, exactly? An economy is a huge, dynamic organism, with lots of moving parts. At any given time, it is buffeted by an array of forces. Tax-and-spend policy is just one of them. Others include monetary policy, the ebb and flow of the business cycle, rules and regulations, asset prices, animal spirits, exogenous shocks, natural disasters, wars and terrorist threats.

To attempt to isolate the effect of $1 of spending cuts on gross domestic product is something only an econometric model can do. And not very well. The real world isn't a science laboratory. It's impossible to orchestrate a control study, where everything else is held constant -- the economist's "ceteris paribus" -- in order to determine the effectiveness of a particular new drug.

That won't stop folks from trying. Within the next month or two, I expect to hear someone from President Barack Obama's administration claim that there were 250,000 "jobs lost or downsized" in the second quarter as a result of the spending cuts, or something to that effect. He or she will tout the damage "uncertainty" is doing to the economy.

It's been almost eight decades since the publication of John Maynard Keynes "General Theory," and economists still can't agree on whether government spending has anything more than a temporary effect on the economy. Don't expect them to be able to isolate the impact of a 1 percent cut of a $3.6 trillion budget of a $16 trillion economy.

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