Sunday, August 25, 2013

Sequester, Pain Not Yet Felt

After a major gashing of teeth the sequester has had less of an adverse effect on the economy than was predicted. But the sequester has failed thus far, because the object was to frighten Congress and the President into agreeing to sensible fiscal reforms that would keep the federal deficit within tolerable limits. The sequester has had only modest economic effects because some of its most onerous provisions were quickly modified and delayed. The pressure on politicians that sequestration was supposed to exert has lifted. Again we have moved into the area of business as usual. To those of us who see government as a bloated and growing monster more cuts are wanted.

While the sequester hasn’t put us squarely back on the track to a balanced budget it has had bad effects according to many. It has slowed the economic recovery, even if not dramatically then at least to some extent. Many federal employees not laid off have been furloughed without pay for several days a month, this has reduced their income and hence their spending as consumers. Sequestration has slashed a number of programs intended to assist the poor and semi-poor. Programs such as "Head Start" and "Meals on Wheels" have had to reduce spending. Only now are we getting more detail than previously disclosed about the potential impact of cuts on fiscal 2014 spending.

Economist such as Keynes make a big point about consumption driving production, which drives employment, to that extent some people feel the sequester has further increased the growing inequality of income and wealth in America, to them it has done further harm to the country. Remember the sequester is only in its fifth month, the bad news is most of the pain of cutbacks is yet to be felt. Federal agencies have been ingenious in delaying the full effects of the sequester by drawing on reserve funds, and hoping that politicians would find another way to deal with budget problems. As these funds become exhausted, layoffs and furloughs will increase. 

On August 22nd a news headline said the Defense Department may have to fire at least 6,272 civilian employees if automatic cuts known as sequestration slice $52 billion from its fiscal 2014 budget, according to a Pentagon planning document. Additional budget analysis is “likely to produce further reductions” as the services focus on shrinking their contract labor forces, according to a Pentagon “execution plan” recently announced. The job cuts, although less than one percent of the non-uniformed workforce, would mark an escalation from the unpaid leave mandated under sequestration in the current fiscal year.

The services should expect a $475 billion budget after sequestration cuts for the fiscal year that starts Oct. 1, 2013 almost 10 percent less than the pending $526.6 billion request, according to the document dated Aug. 1st. Sequestration would result in 16 percent reductions in the Pentagon’s procurement and research spending and 12 percent cuts in operations, maintenance and military construction. For the most part, major weapons programs aren’t being targeted for extensive reductions, according to the plan, which was a presentation by Pentagon budget and cost-assessment officials for generals and admirals who oversee force structure and resources for their respective services. Expect the pain from these cuts to filter down through the economy.

Footnote; Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest such as the post below on how the budget will again be front and center in just a few weeks,

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