Growing Economy Absorbing Sequestration Cuts

Sequestration, the mandated across-the-board budget cuts activated in March, has not triggered the financial apocalypse predicted by many.

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Make no mistake, people have lost jobs and many other Americans have been impacted by reductions in funding to important government services in areas such as health care and education.

But the economy has not plunged back into recession and concerns that U.S. military strength will be weakened have eased with time.

Meanwhile, stock markets continue to rise to record levels, unemployment is gradually ticking lower and consumer sentiment is at its highest point since 2007 aided by a housing market that finally seems to be gaining real traction.

Certainly the most recent monthly jobs report for April gave no indication that sequestration was forcing employers to reduce their workforces. And the numbers for May to be released Friday are expected to maintain the slow-but-steady momentum in the labor market. Economists are forecasting 170,000 new jobs last month with the unemployment rate staying put at 7.5%, its lowest level in four years.

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What’s more, the non-partisan Congressional Budget Office said last month that the U.S. budget deficit will plunge to about $642 billion this fiscal year, down from more than $1 trillion for each of the past four years since the ‘great recession’ of 2008-2009.

“The more you live under the constraining circumstances the easier it’s going to be.”

Steve Ellis, Taxpayers for Common Sense

At the other end of the debate, President Obama has been highly critical of sequestration, saying the budget cuts will force layoffs and unpaid furloughs throughout the government, cause campgrounds at national parks to close down this summer, and deeply impact social services such as Head Start and meals for senior citizens.

The president -- as well as a number of federal agency heads -- has had less to say about sequestration recently as the dire consequences forecasted have not come to fruition.

By and large it seems most people are adjusting to the cuts.

"Not the Apocalypse"

“It’s pretty clearly not the apocalypse,” said Steve Ellis, vice president of advocacy group Taxpayers for Common Sense. “There’s some pain out there, no doubt about it. But I don’t think most people are experiencing more than just some inconveniences.”

Sequestration’s origins lie in the 2011 battle over raising the U.S. debt limit. A compromise was finally reached that included mandated across-the-board budget cuts to take effect in 2013 if no broad agreement could be reached on reducing the U.S. budget deficit.

Eventually the numbers attached to sequestration came to $1.2 trillion in spending cuts over the next decade, with $85 billion carved out of defense and other domestic programs in the current fiscal year.

But it was never supposed to happen. The idea of mandated across-the-board cuts seemed so arbitrary, so unreasonable, so unthinkable that Congress and the White House would surely come together on some sort of agreement to rein in government spending and scale back the national debt.

That never happened, of course, and the unthinkable has become reality. Now that reality is emerging as the norm.

“The more you live under the constraining circumstances the easier it’s going to be,” said Ellis. “Sometimes you have to learn to live with a little less.”

Ellis said the most difficult aspect of the first round of sequestration cuts is that they were truly across-the-board, a straight red line cutting across all facets of affected agencies, leaving those agencies no flexibility in terms of where the cuts might be most beneficial and least harmful.

The U.S. military, for instance, which had to absorb $42 billion in cuts this year but was given far more budgetary discretion than any other federal agency, said recently 680,000 of its 800,000 civilian employees will be required to take unpaid furloughs in 2013.

It will be easier for agencies to scale back their budgets while targeting unnecessary spending in fiscal year 2014 when agency heads will be given more discretion over what and where to cut.

Many economists predicted that sequestration could push the U.S. back into recession. The belief was that the economy was too fragile to absorb not only the loss of tens of thousands of government jobs, as well as all of the consumer spending that goes with those jobs, but also the loss of $85 billion in government dollars.

That hasn’t been the case, however.

Sequestration "Achieving Its Purpose"

The economy is adjusting “better and faster” than many economists expected, said Stephen Fuller of George Mason University’s School of Public policy.

“I suspect that next year the economy, meaning GDP (gross domestic product), will be pushing 3% growth and the impacts from the sequestration won’t be noticed by most people, unless it’s your job,” said Fuller.

According to Fuller, the growing strength of the housing and labor markets in spite of the mandated spending cuts “prove without a doubt that the U.S. economy is more resilient than people thought.”

“The economy is proving itself and it has adjusted more quickly to changing federal spending patterns than had been anticipated,” he said. “On the national level the consequences (of sequestration) are being overtaken by the growth of the economy.”

In sum, sequestration is “achieving its purpose” of cutting government spending, said Fuller.

And the mandated spending cuts set to run through 2021 aren’t likely to be replaced any time soon by some “grand bargain” negotiated by Republicans and Democrats and then blessed by the president.

If anything, Congress is farther away now from finding a budget deficit compromise than it was in 2011 when sequestration was first conceived. As the economy has improved the sense of urgency felt a year or two ago in the immediate wake of the financial crisis has diminished.

Besides, nothing has changed in Washington.

“In the short-term each side is in its own corner shadow boxing,” said Ellis of Taxpayers for Common Sense. “There isn’t any real deal making going on, it’s just talking points.”

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