The Economic Consequences of Sequestration

A great opinion piece on the economics of sequestration by our good friend Professor Peter Morici

The Economic Consequences of Sequestration

By Peter Morici 02/28/13 – 07:44 AM EST

NEW YORK (TheStreet) — Sequestration may impose great and unnecessary damage on the U.S. economy. President Obama and Republicans — so focused on politics and not economics — have miscalculated on both fronts.

The president has spent the last several weeks campaigning for higher taxes and painting a picture of economic Armageddon if he doesn’t get his way — food shortages, massive airline flight cancelations, and the like — and civil disorder — fewer police on the streets and cutbacks in border security. To make the point, federal immigration officials released hundreds of detainees to accommodate budget cutbacks.

Republicans, leaning on economists, are betting the president is overstating his case. Analysts compute slicing $85 billion from federal budget authorizations will not tank the economic recovery.

The Congressional Budget Office estimates that although federal budget authorization will be cut $85 billion, actual spending will be sliced only $44 billion for the fiscal year ending in September.

Furloughed federal employees and contractors will spend less at gas stations and the mall, and considering in this multiplier effect, overall demand for goods and services will decrease about $80 billion or less than one half of one percent of GDP. However, those calculations fail to consider the disruptive consequences of curtailing government activity at critical choke points and provide an example of why thoughtful people often don’t take economists seriously.

The U.S. Department of Agriculture plans to furlough meat inspectors, and consequently beef, pork and poultry processors will be compelled, by law, to curtail operations. The unpaid salaries of inspectors are a mere bleep compared to the potential lost revenue in meat packing and up the supply chain in the livestock, feed, fertilizer and agricultural implements industries.

The same applies to furloughs for air traffic controllers and cancelled flights, lost tourism and other impaired business activities; slowdowns in drug approval process and lending activities at the Small Business Administration; and the list goes on.
All those disruptions could impose many times greater losses than the simple multiplier models economists are applying.

Sadly, the president need not impose such pain by trimming $40 billion from $3.7 trillion in federal spending.

The Budget Act of 2011 limits President Obama’s ability to allocate the cuts among departments. However, House Republicans have offered to draft legislation giving him discretion in where he trims the $40 billion, but the president has indicated no interest in such a deal, and has indicated no inclination to cushion the effects of sequestration on the economy where he has discretion.

The agriculture department has one of the largest staffs of economists in the world. Moving administrative personnel that support food inspectors to that department and furloughing more economists would be better than shutting down the meat packaging industry several days a month and imposing food shortages.

Similar shuffling of personnel in the Department of Transportation could keep the air traffic controllers on the job, and one can only hope the Department of Homeland Security and Federal Bureau of Prisons finds more creative approaches than releasing detainees and inmates into the general population.

President Obama is betting that the pain will create such a public outcry as to force Republicans to raise taxes again.

However, Republicans have a point — the president got $150 billion in new taxes in January — and under current legislation Federal tax revenues will rise well above their average for the last 40 years.

Moreover, health care, social security, and federal pension spending — which are driving the deficits ever higher– are rising much faster than GDP. Without genuine entitlement reform, another tax increase will only buy a few years and place the whole deficit mess on the desk of the next president.

Those are hard facts — and repeating endlessly that 51 percent of the population voted for him on a platform of raising taxes on 2% of the population doesn’t change those facts.

Simply the deficit is an economic problem, the president’s divide and conquer strategy may bring House Republicans to heel but it won’t do the nation much good.

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