Saturday, March 2, 2013

Sequester ooga-booga!

Well, the sequester has now been put in place, at least for the time being. So what are these billions in budget cuts really going to do, both for the country, and for our backyard? A couple of releases from this week can give us a clue.

First of all, the Congressional Budget Office gave an update on the changes to GDP and the budget deficit if the sequester was to stay in place. When combined with the tax increases on the rich and on Social Security payroll taxes, it will reduce the size of the recovery that currently rolls on, with the sequester causing more damage on a "bang-for-the-buck" basis.
The fiscal tightening in 2013 is mostly a result of two developments: the expiration of certain tax policies that will lead to an increase in tax revenue (relative to 2012, payroll tax rates are higher and tax rates on income above certain thresholds have increased); and the automatic spending reductions scheduled to occur under current law (the sequestration). In the absence of those policies, real GDP would grow about 1¼ percentage points faster between the fourth quarter of last year and the fourth quarter of this year, CBO estimates. (The remaining ¼ percentage point reduction in economic growth due to fiscal tightening comes from other, smaller changes in spending and taxes.) The expiration of those tax provisions and the automatic spending cuts account for about equal portions of that 1¼-percentage-point effect. The spending changes have a smaller budgetary impact than the tax changes, but they affect GDP by a larger amount per dollar of budgetary cost.

In the absence of sequestration, CBO estimates, GDP growth would be about 0.6 percentage points faster during this calendar year, and the equivalent of about 750,000 more full-time jobs would be created or retained by the fourth quarter.
Given that there's only 10 months left in the year, that means about 75,000 fewer jobs a month will be created due to the sequester- pretty stupid in a time when the country is still at 7.9% unemployment, and has barely come back to the job levels of 5 years ago.

But if you're into deficit reduction above all else, the sequester and the tax increases doe help. As CBO notes
In fiscal year 2013, by CBO’s estimates, federal revenues will rise and outlays will decline as shares of gross domestic product (GDP), resulting in a federal budget deficit equal to about 5.3 percent of GDP (compared with 7.0 percent last year).
This 5.3% is nearly half the deficit as a percentage of GDP that Obama had to deal with in September 2009, and is down near the levels of the Reagan Administration deficits of 1983-1986. Still not optimal, but when high unemployment and low wage growth still persist (past the levels we had in the '80s), I'd say the deficit is still in third place when it comes to dealing with priorities.

It's not like government spending is out of control. Anything but, as this week's GDP revision confirmed. This revision showed US growth was indeed continuing, instead of the contraction it showed last month, but the Government sector continues to shrink and take away from GDP.

With this in mind, along with interest rates on the 10-year note staying below 2%, we really don't need to worry about government spending as a "problem", and we still need investments and economic stabilizers to keep this economy moving. The alternative is to go into a European-style recession, illustrated again this week as the UK officially announced that it was in a triple-dip recession with manufacturing output shrinking fast. I don't think recession is an acceptable option at this point.

Know another group that'll feel some pain from this sequester? Scott Walker and the WisGOPs that are trying to pass a budget for the next two years. The first reason deals with the slower economic growth, as this will slow income and sales tax growth, and was not assumed to kick in when the LFB did their revenue estimates a few weeks ago. So start shrinking that alleged surplus for the 2011-2013 budget, and start lowering revenues for the deficit-ridden next one as well.

In addition, the sequester cuts the amount of money sent to state and local governments, to the tune of $188 million over the next 2 years for the State of Wisconsin. This was not put into the Walker Administration's budget that was sent down to the Legislature last month, so add another $188 million in budget holes to be filled by the leggies.

Oh, and there are also direct aids that go to schools in the form of Title I funds, colleges for work-study, and Head Start providers. The Obama Administration spelled out the estimated effects to Wisconsinites in this sheet released last week.
Teachers and Schools: Wisconsin will lose approximately $8.5 million in funding for primary and secondary education, putting around 120 teacher and aide jobs at risk. In addition about 10,000 fewer students would be served and approximately 50 fewer schools would receive funding.
o Education for Children with Disabilities: In addition, Wisconsin will lose approximately $10.1 million in funds for about 120 teachers, aides, and staff who help children with disabilities.
􀂾 Work-Study Jobs: Around 550 fewer low income students in Wisconsin would receive aid to help them finance the costs of college and around 420 fewer students will get work-study jobs that help them pay for college.
􀂾 Head Start: Head Start and Early Head Start services would be eliminated for approximately 900 children in Wisconsin, reducing access to critical early education.
That's on top of any cuts the Walker Administration will give to schools and other services. You can see where keeping the sequester long-term becomes a major double-whammy for a lot of places in the next year.

So while we may not see an immediate crash, it looks like keeping the sequester in place would lead to slow-motion train wreck as services deterioriate and the cuts come gradually throughout the coming months. But these cuts would hurt, and if it's not remedied, things will look very different and gloomy for 2014.

I think I'm like a lot of people: I'm tired of a substandard economy, and don't want to see us fall back any time soon. With that in mind, I'd hope the sequester fix is tucked into the full-year budget negotiations that must be completed by March 27 (if that March 27 deadline isn't met, you will see an immediate crash). And I think we still need to emphasize job and wage growth as the first priority, and go for deficit-reduction policies at a later point, when unemployment is down and incomes are going up. That ain't happening enough right now.

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