Blame It on Sequestration

President Obama and the Federal Aviation Administration blamed recent flight delays on sequestration.  Now the Federal Reserve Board’s Open Market Committee is blaming sequestration for the poor performance of the U.S. economy.

Both claims are equally frivolous.

As The Wall Street Journal noted, “The FAA’s all-hands furloughs managed to convert a less than 4% FAA budget cut into a 10% air-traffic control cut that would delay 40% of flights. The 6,700 flights that the FAA threatened to force off schedule every day is twice as many delays as the single worst travel day of 2012.”

With members of Congress among those affected by the flight delays, Congress acted with uncharacteristic quickness and approved a bill to revoke FAA’s politically motivated furloughs.

As for the economy, The Fed’s assessment raises a few issues:

  • The sequester took place in March.  It cut this year’s $3.8 trillion budget by $85 billion, or about 1.2%.  Most of the cuts will not even taken place for months.  Yet The Fed is suggesting that sequestration is responsible for the country’s dismal economic performance.
  • For sequestration to be a drag on the economy, consumers would have had to anticipate it years ago.  The Great Recession began in 2008 and in the more than three years since it ended, growth has been lackluster at best.  Cumulative growth for three years following past recessions has typically exceeded 15%.  This time, it totaled less than half that – 7.13%.  Is The Fed suggesting that, if not for sequestration, the economy would have finally regained its strength at the beginning of March?
  • When the year began, those Americans who are lucky enough to be employed began paying an extra 2% of their income toward higher payroll taxes.  Capital gains taxes, estate taxes and other taxes increased even more for individual taxpayers earning more than $400,000 and families earning more than $450,000. Those making more than a million dollars year saw their taxes increase by an average of $171,300 a year.  Could it be that this $1.6 trillion tax hike has had an impact on the economy?  There’s been no criticism of the tax hike from The Fed, though.

Meanwhile, with the jobs market apparently weakening again, The Fed announced that it will continue purchasing $85 billion in bonds a month though its quantitative easing program (QE3).

What if all of this bond buying is part of the problem, not part of the solution?

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