Wed February 27, 2013
Economists See Budget Cuts Putting The Recovery At Risk
Originally published on Thu February 28, 2013 3:52 pm
Getting economists to agree with each other isn't easy. But Congress and the White House have managed to unite them.
More than 95 percent of top U.S. economists believe growth is "likely to be negatively affected" by the automatic federal spending cuts that are scheduled to kick in Friday, according to the latest survey by the National Association for Business Economics.
Federal Reserve Chairman Ben Bernanke joined the economists' chorus Tuesday, telling Congress that the spending cuts' harm will be "significant," with "adverse effects on jobs and incomes."
Americans nodded in agreement. A poll by the Pew Research Center and The Washington Post finds that by a margin of 62 percent to 18 percent, people think the sequester will have a mostly negative impact on the economy.
This nearly universal disdain is being directed at the blunt budget ax known as sequestration. Unless Congress takes action, across-the-board cuts, effective Friday, will chop $85 billion in federal spending over the seven months remaining in this fiscal year. Half the cuts must come from the military and half from "discretionary" domestic programs, such as those involving medical research and border patrol.
But while economists are clear that sequestration will cost jobs and depress growth, they differ over how long the harm will persist, and how deep the damage will be.
The nonpartisan Congressional Budget Office offered a typical assessment, estimating that the cuts will knock 0.6 percentage point off the annual growth rate and cut 750,000 jobs by year's end.
In the NABE poll, most economists agreed with that ballpark estimate, figuring sequester will shave roughly a half-percentage point (or maybe a little less) from this year's gross domestic product. In other words, instead of growing at a rate of, say, 2.9 percent in 2013, the GDP might expand at only 2.4 percent. That's enough to retard job growth, but not to derail the recovery.
But some economists are much more worried. In the NABE survey, a third of economists see more harm coming than the CBO does, and 13 percent fear growth could be cut drastically — by more than a full percentage point. Given that in 2012, the U.S. economy grew just 2.2 percent, losing a full percentage point could put the economy on track for another recession.
Some conservative economists, however, have a more sanguine outlook. While agreeing that growth will take a brief hit, they say it's better to cut spending now — even if with an ax — rather than do nothing as federal borrowing grows to unsustainable levels.
Besides, in a $16 trillion economy, the budget cuts would sting for a bit but "would not amount to a lot, especially since the private sector appears to be picking up more steam," Gary Becker, a conservative economics professor at the University of Chicago, wrote on his economics blog.
No matter how things turn out in the long run, this much is clear: Friday could be a depressing day for people who earn their living with the help of government funds. Threatened workers would have to start bracing themselves and reducing personal spending — even if it takes a few weeks for the sequester cuts to make their way through the funding pipeline to finally smack them.
In general, economists are concerned about four big areas of impact:
Half of the coming cuts, roughly $45 billion in this fiscal year, are concentrated in the defense sector and aimed at private contractors, such as those involved in replacing the aged aerial-refueling tankers or maintaining ships. Last week, the Pentagon notified Congress that it may have to furlough some 800,000 civilian employees, asking them to take a 20 percent pay cut — by staying home one day a week without pay through this fiscal year.
At a media briefing, Transportation Secretary Ray LaHood said he would institute unpaid furloughs for air traffic controllers, which could cause "delays of up to 90 minutes during peak hours" at major airports. Also, the Transportation Department would have to shutter more than 100 air traffic control towers. Disruptions at popular destinations might also depress travel. Just one example: workers at Yosemite National Park will have to put off plowing snow from the road leading into the park, leaving many visitors stranded until the snow melts.
Many jobs related to law enforcement and emergency response rely on federal funding. For example, the Federal Emergency Management Agency would cut grant funding that supports firefighter positions and emergency-management personnel. About 1,000 FBI agents and hundreds of federal prosecutors also could lose jobs or be ordered to take unpaid furloughs, which could undermine local crime-fighting efforts. Title I education funds also would be cut for more than 2,700 schools, putting the jobs of about 10,000 teachers and aides at risk.
The coming job cuts and unpaid furloughs could reduce consumer spending at a time when many people already are feeling squeezed by higher payroll taxes and gas prices. In a written assessment of the latest consumer data, Chris Christopher, director of consumer economics for IHS Global Insight, said rising confidence could quickly reverse. "Rising gasoline prices and the sequester are on many households' radar screens," he said.