Wednesday, November 21, 2012

The Last Fiscal Cliff, 1981

For those who wonder about the broad economic impact of the federal budget cuts scheduled to go into effect next month, there is a historical precedent to look at. In 1981 federal budget adjustments took away roughly 1 percent of U.S. jobs. The result was the Reagan Recession, a recession described at the time as the worst recession since the Great Depression. Next year’s cuts are on a larger scale, but probably still less than 2 percent of U.S. jobs.

There are, to be sure, important differences to consider. The Reagan administration had strong political incentives to create a recession and boost unemployment, incentives the current administration does not share. The biggest share of cuts next year will fall on defense contractors, in accordance with their share of the federal budget, and there, the impact on consumer spending is minimized. By contrast, defense was exempt from the 1981 cuts.

Some people looking ahead to the scheduled spending cuts of 2013 suggest that the large-scale job cuts can occur without causing a recession. Alas, there is no precedent for that. But the experience of 1981 suggests that the turmoil of the recession of 2013 may go unnoticed by most, and may be largely forgotten by the end of 2015.