Sequester will mean lost jobs and less growth

News Analysis

(MoneyWatch) On Friday, the budget sequester is set to take effect unless Congress takes action to prevent it. If it does go into effect, and at this point that appears likely, what impact will it have on the economy and our ability to recover from the recession?

The automatic budget cuts in the sequester will trim $85 billion from the government's budget this year. Some agencies will be able to delay the cuts into future years, so the actual impact may be less than that - the CBO estimates it could fall to $44 billion - but that could still have a negative impact on economic growth at a time when the economic recovery is already recovering at a very slow rate. For example, the private forecasting firm Macroeconomic Advisers estimates that "sequestration would cost roughly 700,000 jobs (including reductions in armed forces)" and add a quarter of a point to the unemployment rate.

 "The higher unemployment would linger for several years," the group predicts.

Fed Chairman Ben Bernanke had a similar assessment in testimony before the Senate Banking Committee this week.

"The CBO estimates that ... the automatic spending sequestration that is scheduled to begin on March 1 ... will contribute about 0.6 percentage point to the fiscal drag on economic growth this year," Bernanke said. "Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions."

Bernanke went on to urge Congress to "consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run."

Yet another assessment of the impact of the sequester given by Mark Zandi of Moody's Analytics comes to a similar conclusion. He forecasts that "If the full sequester takes effect as ordered in current law, the hit to real GDP this year will be about 0.5 percentage point."

It's not just the timing of the cuts, it's also the design. The cuts in the sequester were intended to be loathsome to both political parties as a means of motivating Congress to action on our long-term budget problem. These are not well thought out spending cuts and tax increases; they are across the board cuts to military and discretionary programs that are supposed to bring a stalemated Congress into agreement. Because of their poor design, the negative effects of the cuts are magnified.

Finally, this is just the first year of the cuts under the sequester, which must total $1.2 trillion over the next ten years. In future years, the cuts will be even larger -- and larger still if agencies delay some of the cuts this year into the future. While it's unlikely that Congress will allow such poorly designed cuts to stay in place for the full 10 years, there's no telling how it will take the government long a better plan will take. In the meantime, the economy will pay the cost.

Our budget problems are not immediate, and with budget cuts and tax increases of $2.5 trillion over the next ten years that have been made since 2011, there has already been substantial progress on bringing the long-term debt under control. There is no need for the poorly designed, ill-timed, and harmful cuts that are about to be made. We have plenty of time to do this in a way that distributes the debt reduction burden where it will be felt the least. Instead, Congress is about to make it even harder for the economy to recover, and even harder for millions of unemployed workers to find jobs.

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