by Bill McBride on 2/10/2013 10:29:00 AM
Sunday, February 10, 2013
A key policy goal right now is to minimize short term austerity since the deficit as a percent of GDP is already shrinking quickly, and the deficit should continue to shrink over the next few years. So my view has been that something would be worked out on the "sequester" that would minimize immediate spending cuts.
It appears I may be wrong, and the "sequester" cuts might happen on March 1st.
From the LA Times: Automatic budget cuts are almost certain
In less than a month, a budget ax is set to fall on the federal government, indiscriminately chopping funding for the military and slicing money for various programs, including preschools and national parks.This is a significant amount of short term drag, especially combined with the increase in payroll taxes (part of "fiscal agreement").
The $85 billion in cuts that would take effect from March 1 through September — the first installment of $1.2 trillion in reductions over the next decade — would strike just about every agency and service in an attempt to ease the budget deficit.
The slashing, part of an automatic process known as sequestration, would affect the economy, government workers and average Americans in ways big and small.
Economists project the budget cuts would reduce the nation's total economic output by about 0.6 percentage points this year, a significant hit when growth remains sluggish.
Brad Plumer at the WaPo describes how the sequester cuts would work:
The sequester, recall, will cut $85.3 billion from the federal budget in 2013 and affect everything except Social Security, Medicaid, a few targeted anti-poverty programs, and the ongoing wars. The Pentagon budget would face an immediate 7.3 percent cut and domestic discretionary programs would be cut by more than 5 percent. The key feature of the cuts is that they would affect all agencies and programs equally ...Here is the White House fact sheet on some of the cuts.
This is obviously bad policy. First, the US doesn't need immediate spending cuts (if anything, with a 7.9% unemployment rate, we need additional short term spending), and second, we don't need indiscriminate cuts. No one supports these specific cuts, but they might happen anyway ...