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Sequestration's Impact Looms

President Obama is expected to release his annual budget April 10, about two months after it was due. Does it matter that the budget is late, and what changes might it have for entitlement programs? University of Chicago professors Austan Goolsbee and Steven Kaplan join us on Chicago Tonight at 7:00 pm.

The Congressional Budget Office estimated the $85 billion in sequestration cuts would cost the economy about 750,000 jobs--both in losses and fewer new jobs--by the end of the year. But some economists say the jobs lost may be closer to 300,000, as many federal agencies furlough workers instead of reducing its workforce.

But furloughing workers as opposed to firing them still means cuts to services will be felt at a local level. The Huffington Post compiled a list of articles about the sequester over the last week detailing cuts from across the country--everything from curtailed early childhood programs to reduced spending on academic research and development.

As the sequester cuts were being authorized by President Obama last month, economists differed on whether the cuts would be detrimental to the economy, but most agreed the broad cuts were worse than more targeted cuts. There was initially talk that the spending might be restored by April, when the government’s money was expected to run out, giving an opening for a comprehensive budget deal. Instead, Congress passed a continuing resolution, funding the government through September, and making the sequestration cuts a new baseline for federal spending.

“I think the sequester was stupid,” says Goolsbee, the former chair of the president’s Council of Economic Advisers. “That’s a dumb way to run the government...We haven’t been able to confront an actual grand bargain to address the long-run fiscal challenge facing the country. To do that, you need to have some cuts and some revenues, and where we keep foundering is on the rocks of the same group of people in Congress saying there can’t be any revenue whatsoever, even it was 10 to 1, cuts to revenue.”

Goolsbee’s colleague Kaplan estimates the sequestration cuts will be minor, and says the economy is harmed more from the tax increases at the end of 2012 than these cuts.

“The administration wanted everyone to think it was going to be doomsday, before [sequestration] went into effect, to not have it go into effect,” Kaplan says. “Remember, $70 billion is 0.4 percent of the U.S. economy, so it’s a very small number. And government spending increases this year versus last year, not in real terms, but in dollars.”

Now, attention turns to the federal budget. House Republicans and Senate Democrats passed their own plans last month, and President Obama is expected to release his proposals next week. But, with a Republican plan that calls for no net tax increase and a Democratic plan that would raise nearly $1 trillion in taxes, the prospect for a “grand bargain” fades by the day, Goolsbee says.

But Kaplan thinks the sequester actually improves the chances of a bigger deal.

“I think something will get passed,” Kaplan says. “I don’t know about this year. The thing that gives you some hope is that the debt-to-GDP ratio today is about 75 percent. It’s going to be flat for five, 10 years. We have some time to get this done. It blows up after 2020, but you have some time to get it done. The sequester is really good, while [Goolsbee] disagrees with that, because it shows people you can actually cut and it’s not pleasant, but it’s not doomsday."