Macro And Micro Economics

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Macro and Micro Economics

Sequestration in this context is referred to as the cutting of budget by the government

with an aim of reducing budget deficits in recession. Sequestration includes government

spending cuts policy, tax increases policy, or a mixture of both. The reductions uniformly

divided between defense related discretionary spending and non-defense discretionary spending.

In microeconomics perspective, reduction in government spending leads to increase in

unemployment. This, on the other hand, reduces revenues on tax. Moreover, government

spending plays a crucial role in gross domestic product growth (Olivier and Robert, 2002).

Sequestration was enacted in the 2011 debt ceiling crisis. The Budget Control Act of

2011 focused on significant across the board reductions in government spending starting

January, 2013. However, these reductions in spending were postponed to March, 2013. This

was arrived at with an aim of avoiding the fiscal cliff.

However, in this context, sequestration aims at reducing the government debt. This

ensures stability to financial markets and investors by ensuring a Greek-style meltdown less

probable (International Monetary Fund, 2010). With fragile overall economic activity, many

fear that a decline in government expenditures could result to recession in the U.S. economy.

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The impacts of the cut in government spending of eighty five billion U.S. dollars have on U.S.

economic activity. However these impacts on economy largely depend on economic multiplier.

According to most estimates economic multipliers of spending are smaller than 1; this means

that, a rise in one dollar on government spending result to less than one dollar increase of gross

domestic product. The spending multiplier is usually less than one due to crowding out effect.

Recourses utilized by the government are obtained from the private sector.

The most recent estimates of spending multipliers were developed by Barro and Redlick.

They focused on variant in defense and non-defense expenditure in the United State on various

time from 1917. Defense spending resulted to greater variation, especially in World War II and

the Korean War. The variation was as a result of war instead of economic perspective. Non-

defense expenditure has a challenge of lack relative of variation as well as the issues of reverse

causality (Bania, Gray and Stone, 2007). As a result, Barro and Redlick claim that defense

expenditure gives the best means to estimate expenditure multipliers. For provisional defense

expenditure, their estimates range from 0.4 to 0.5 for contemporary GDP impacts and 0.6 to 0.7

for GDP impacts in duration of 2 years. The multipliers are higher by 0.1 to 0.2 if the defense

spending is permanent. This implies that extra dollar added to defense expenditure improve

gross domestic product by a smaller amount than a dollar.

According to Alesina and Ardagna, 2010, fiscal incentive centered on tax cuts is more

probable, to enhance growth than those centered on expenditure increases. On the other hand,

fiscal policies centered on expenditure cuts with no tax raise are more probable to do well at

cutting deficits and debt. Moreover, the International Monetary Fund analyzes one hundred and

seventy instances of fiscal policies in 15 developed economies over the 30 years. The finding

was that expenditure cuts are much less negative impact to short term growth than are tax raise

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(International Monetary Fund, 2010). According to the finding of IMF, one percent spending

cut has no significant effect on growth. Moreover, reductions into transfer payments have no

statistical impacts on short run growth. The point estimate indicates that cuts fuel growth. On

the other hand, cuts to government expenditure and investment slow economic growth in the

short run. They approximate that reducing public investment by one percent of GDP reduces

GDP by 0.6 % after three years (David Logan, 2011).

From the first graph sequestration result to a shift of AD curve to the left. This result

increased unemployment. However, sequestration in the short run does not have effect on GDP;

hence it has no effect on economic growth. On the other hand, sequestration will have a very

small significance on GDP in the long run. Therefore, in the long run sequestration will slow the

economic grow.

In conclusion, with right fundamental ground in an economy, sequestration is good. It

does not affect slow economic growth in the short run, but budget deficit in an economy is

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reduced. The application of sequestration largely depends on spending multiplier effect. In the

long run sequestration is likely to slow economic growth. However, the effect is not that

significant.

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Work Cited

Alberto Alesina and Silvia Ardagna, Large changes in fiscal policy: taxes versus spending, in

Tax Policy and the Economy, Vol. 24 (2010).

Bania, N., Gray, J. and Stone, A. Growth, taxes, and government expenditures: growth hills for

U.S. states, 60 National Tax Journal 193-204 (2007).

International Monetary Fund, Will it hurt? Macroeconomic effects of fiscal consolidation, in

World Economic Outlook: Recovery, Risk, and Rebalancing (2010), web. 12 May

2013<http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf.>

Olivier Blanchard and Robert Perotti, An Empirical Characterization of the Dynamic Effects

of Changes in Government Spending And Taxes On Output, 107 Quarterly Journal Of

Economics 1329-1368 (2002).

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