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Sequester Forcing Washington to Negotiate a Better Solution Says BNY Mellon's Richard Hoey

Great Disasters Dodged; Economic Expansion Expected in 2013

Dissatisfaction with the badly-designed U.S. sequester may be used to help motivate a "mini-bargain" compromise to replace the initial year of the sequester, according to BNY Mellon's Chief Economist Richard Hoey in his most recent Economic Update. Hoey thinks this compromise may retroactively reduce the size of the planned fiscal drag.

"The sequester was intentionally designed to be bad economic policy in order to motivate a political compromise on a better substitute," says Hoey. "The adoption of a fiscal policy intentionally designed to be dysfunctional in its impact appears to be a unique American policy innovation, one unlikely to be copied by other countries," he continued. "If the sequester goes into effect, it could be followed by a compromise on a better-designed substitute within a few weeks."

Other report findings include:

  • Great Disasters Dodged and Financial Conditions Eased - Extreme negative scenarios were avoided last year - China avoided a hard landing. The European financial crises and recession did not produce a meltdown or breakup of the euro. Last-minute legislation mitigated the magnitude of the scheduled U.S. tax increases / fiscal cliff - all of which, according to Hoey, have led to global financial easing.
  • Economic Expansion Expected - Hoey expects 2013 to be another year of expansion at a sluggish average real GDP growth rate somewhat above 2%, with growth likely to be slower earlier in the year and faster later in the year.
  • Core Europe Near Transition - Hoey states that core Europe is near a transition from a full-scale recession to a hesitant economic recovery at a very subdued pace, while peripheral countries are likely to remain in recession throughout 2013.