Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Why Sequester May Be Exactly the Right Policy for the Economy

Brendan Smialowski | AFP | Getty Images

What if the sequester that everyone thought we must desperately avoid turns out to be exactly the right policy?

One useful intellectual exercise is to assume that our political system is smarter than individual politicians or parties. Call it the wisdom of crowds, or the Efficient Government Hypothesis. The idea is that the outcomes our system produces are better than the positions of those who seek to influence the outcomes.

So the combination of the sequester and the start of the year Obama tax hikes is telling us something that almost no one in politics today argues: We can afford short-term deficit cuts produced by spending cuts and tax hikes, and we can safely ignore the long-term deficit.

Now keep in mind that this is exactly the opposite of what appears to be the consensus. Federal Reserve Chairman Ben Bernanke is probably the most prominent proponents of the view that the U.S. needs to adopt a Augustinian approach to deficits: Lord save us but not now. The basic idea is that the economy is so weak that the government needs to run short-term deficits, but the long-term deficit is so scary that it needs to be addressed as soon as possible.

The primary dissent from this view comes from Republicans who argue that the U.S. government has a spending problem and a deficit problem. They say that both long-term deficits and short-term deficits need to be addressed right now.

Which means that the actual policy we've adopted — short-term deficit cuts while ignoring long-term deficits — has nearly zero supporters (the notable exception being CNBC's Larry Kudlow). Any decent contrarian should at least ask: Could we have stumbled upon the right approach?

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