President Barack Obama and Congressional leaders met again this morning for one final round of last-minute talks, which, as expected, produced no results. Unlike previous frantic efforts to avoid the debt-ceiling and the fiscal cliff, this morning’s meeting seemed more like a show for the cameras than the last stretch of marathon negotiations. Despite the rhetoric, Democrats and Republicans have long appeared willing to let the country take the plunge this time.
That’s likely because, as Washington’s manufactured fiscal crises go, the sequester doesn’t look like a particularly scary one. It wouldn’t directly threaten the creditworthiness of the U.S. government nor plunge the economy back into recession. Financial markets seemed much more concerned about the tax-hikes part of the fiscal cliff legislation than its spending cuts, which were postponed until today in a Hail Mary deal signed on January 1. Sure enough, stocks are trending down this morning, but it’s what you’d describe as investors being in a sour mood, not having panic seizures.
Americans didn’t seem all that worried either: 40% said they wanted the cuts to go through, according to a recent Pew Research Poll, and another 11% didn’t have an opinion on the matter. In part, it might be because Washington’s scripted fiscal crises have started to lose their dramatic appeal: how many times can policymakers cry wolf and expect the fretting public to tune in? In part, it was a sheer question of numbers: $85 billion sounds woefully small compared to $11 trillion in federal debt. Besides, the reduction in 2013 outlays (which is the money actually spent in a given year) will only be $42 billion. The other half of the money represents cuts in spending authority, or how much federal agencies are allowed to commit this year for future expenditures. Now, that $42 billion accounts for just over one per cent of the $3.5 trillion in total 2013 outlays projected by the Congressional Budget Office.
The actual impact of the cuts, though, might be much more serious than the headline number reveals. That’s because the spending reductions will hit in all the wrong places. Instead of trimming off waste — say, terminating unnecessary or duplicate programs and laying off the bad apples — the $85 billion will come from things like furloughing some 800,000 Defense Department employees and erasing funding for 24,000 teacher salaries, according to the White House. Canada might see some nasty spillovers too, as border authorities weigh cuts to personnel that could slow down bilateral trade and travel.
All this is likely to keep the unemployment rate stuck at eight percent for the year and shave off up to 0.6 percentage points off GDP growth, say economists — not enough to trigger a recession but considerable hit nonetheless, especially as the recovery is just starting to gain momentum. And feebler growth means the sequester might actually increase the U.S. deficit this year, rather than reduce it, Federal Reserve Chairman Ben Bernanke said this week during a Congressional testimony. A weaker GDP expansion means fewer Americans will find jobs or see their incomes rise, this slowing down public revenue growth. At the same time, government expenditures that increases in automatically when the economy is in dire straights — think unemployment benefits and welfare transfers, for example — won’t shrink as quickly.
It might take until mid April for the effects of the cuts to become fully apparent. (And that’s assuming the sequester isn’t overshadowed by a government shutdown, which looms on March 27 unless Democrats and Republicans agree on a deal to continue to fund federal agencies.) When they do hit, though, expect Americans stuck at the airport for hours or unable to send their kids to preschool to bring the issue up with their Congressmen. If the threat of the sequester wasn’t enough to force U.S. policymakers to find more sensible trimming, its real-life impact might.
Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. Follow her on Twitter: @ealini.