The “sequester,” a uniquely Washington word, has entered our economic vocabulary recently. What's it mean?
It means on March 1, 2013, across-the-board cuts in government spending go into effect, meaning every non-entitlement federal program will have to cut its budget. It was designed to be a ticking time bomb, part of the debt ceiling negotiations of 2011. Under its provisions, either lawmakers came to an agreement on deficit reduction in the following months or a meat cleaver would be taken to the federal budget.
"The sequester was intentionally designed to be bad economic policy in order to motivate a political compromise on a better substitute," said Bank of New York Mellon chief economist Richard 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."
So, in effect, the sequester is all about a political tap dance. Democrats prefer to address the deficit through tax hikes, Republicans through spending cuts. Neither side has shown much willingness to budge.
Hoey believes that once the sequester takes effect lawmakers will actually try to come up with some sort of compromise. So, will you be affected by all of this?
It depends. If you work for a major defense installation or a government contractor, you could be. In fact, Rep. Rob Wittman (R-Va.), whose district includes the Newport News Naval Shipyards and a number of naval facilities, says the effects of the sequester are already being felt.
“Work for shipyard workers has been delayed and many men and women in uniform have been asked to stay home just days before they were set to deploy, injecting a great deal of stress on service members and their families,” Wittman said. “The Hampton Roads military community and shipyard already know firsthand the effects of sequestration.”
If you work for the federal government you might also be affected, especially if you work for a national park. Some workers might be furloughed, although for how long is a subject of debate.
Little impact in the private sector
If you work in the private sector, however, there may be little impact. The latest Wage Trend Indicator from Bloomberg BNA suggests little change in annual wage growth for private sector workers in the coming months. At the same time, if you are out of work it might make it harder to get hired.
"Labor market conditions overall have been improving slowly, but the economy remains somewhat weak," economist Kathryn Kobe, a consultant who maintains and helped develop Bloomberg BNA's WTI database, said. "Although the fiscal cliff has been avoided, there's still a lot of uncertainty about the economic impact of a possible federal budget sequester, and businesses appear hesitant to hire new employees," Kobe said.
Employees of, and visitors to national parks may feel some pain. The Coalition of National Park Service Retirees projects sequestration will cut visitor access to the rim of the Grand Canyon, significantly delay the spring opening of key portions of Yellowstone and Yosemite, reduce emergency response help for drivers in the Great Smoky Mountains, limit access to the beach at the Cape Cod National Seashore, and impair the experiences in many other ways for millions of visitors at America's national parks.
In addition, local, regional and state economies that depend on national parks will probably take hits as visitors are either turned away or skip visits due to the impact of the mindless sequestration budget cuts.
The group's report says sequestration will result in a much-reduced workforce, shutdowns of certain national park areas altogether or for extended period of times, closure of visitor centers and services, restrictions on the availability of campgrounds, visitor centers, comfort stations, and trail and other backcountry access. Additionally, the ability to respond to emergencies including wild fires will be sharply reduced.
Before you castigate Congress and the White House for being unable to reach an agreement on how to reduce the deficit, consider this Harris survey that suggests the American people can't even agree.
Public is divided
According to the survey, only 12% of the public want to see a cut in Social Security payments, 19% want to cut federal aid to education and 23% want to cut federal health care programs. But on the other hand, over three in ten U.S. adults want to see increases in spending for education (37%) and health care (31%).
The only programs of the 20 listed in the poll that half or more of Americans want to cut are foreign economic aid (77%), foreign military aid (74%), spending by regulatory agencies (55%), subsidies to business (54%), federal welfare spending (51%), and the space program (50%). Unfortunately, those programs account to only a tiny fraction of federal spending.
Which brings us to a final somber note. The sequester cuts, which have Washington in a panic, hack $85 billion a year from the federal budget. While that is a lot of money, consider this: the annual deficit is $1 trillion.
If reducing the deficit by a measly 0.85% can cause such alleged economic harm, it is difficult to see how the U.S. government will ever be able to live within its means.