EFFECTS OF THE FEDERAL BUDGET CUTS, AKA THE SEQUESTER

ABSTRACT: The $85 billion in federal budget cuts that went into effect on March 1 have now had time to have measurable effects. Most economists agree that the cuts, known as “the sequester,” have slowed economic growth by at least 1.5 percentage points. Joseph J. Minarik, an economist, cannot remember “when fiscal [i.e., federal budget] policy was so at odds with the needs of the economy.”

Effects of the sequester are having significant impacts on people’s lives, but continue to be ignored by Congress. The budget cuts are having the following effects (among others): In July, 199,000 federal workers had work hours reduced and contractors lost work; Federal court proceedings have been dramatically slowed and the number of federal law enforcement and probation officers has been reduced; The FBI will shut its headquarters and offices on 10 weekdays over the next year; The National Institutes of Health is cutting $4 million from the $9 million core contract for the Framingham Heart Study, one of the most important and unique research projects in medical history; The decline in federal money for scientific research has been exacerbated, leading 18% of scientists to consider taking their research to another country; The Coast Guard has cut patrols, training, and purchases of new equipment; and Efforts to remove unexploded land mines have been canceled or curtailed.

FULL POST: The $85 billion in federal budget cuts that went into effect on March 1 (which were part of the so-called “fiscal cliff”) have now had time to have measurable effects. Most economists agree that the cuts, known as “the sequester,” have hurt economic growth and the creation of jobs. They estimate that the reduced federal expenditures have slowed economic growth by at least 1.5 percentage points, with more harm to the economy and jobs expected if Congress and the President allow the cuts to continue.[1]

According to a recent NBC News/Wall Street Journal survey, 22% of Americans say they have been “significantly affected” by sequestration cuts. Among people earning below $30,000, 31% say they have been affected by the sequester. [2]

Joseph J. Minarik, economist and director of research at the corporate-supported Committee for Economic Development, says he cannot remember “when fiscal policy was so at odds with the needs of the economy.” Similarly, University of Michigan economist Justin Wolfers says, “The disjunction between textbook economics and the choices being made in Washington is larger than any I’ve seen in my lifetime. … At a time of mass unemployment, it’s clear, the economics textbooks tell us, that this is not the right time for fiscal retrenchment.” Given the consensus on this in the often fragmented economics profession, he adds, “To watch it be ignored like this is exasperating, horrifying, disheartening.” Warren Buffett, billionaire investment guru, stated that the sequester “is a stupid way to enact a cut in the budget.” [3]

The economic and jobs situations would be even worse if the Federal Reserve (the Fed) wasn’t taking aggressive actions to stimulate the economy (including holding interest rates extremely low) that offset some of the drag on the economy from federal budget cuts. However, it is likely the Fed will begin reducing one of its stimulus measures soon (the one known as quantitative easing).

As you may remember, the sequester’s cuts to air traffic controllers caused flight delays (that affected members of Congress as well as all the rest of us), so Congress acted with rarely seen speed to provide funding for them (see post of 4/30/13). However, other effects of the sequester, which are having far more significant impacts on people’s lives than having a flight delayed, continue to be ignored by Congress even as the real, measureable impacts are being felt. Given that the cuts were applied across the board, the range of effects have been broad. Here are some examples:

• In July, 199,000 federal workers had work hours reduced and contractors lost work due to the sequester, thereby curtailing a wide range of services. [4] As workers’ incomes are reduced, some by as much as 30%, the impact ripples through the economy, stifling economic growth and job creation. These workers run the gamut from Internal Revenue Service (IRS) employees to public defenders in the federal court system to civilian employees of the military, many of them scientists, engineers, and medical staff. In Massachusetts alone, these cuts are expected to take $45 million out of the local economy. (Woolhouse, M., 7/22/13, “State feels pinch on federal workers,” The Boston Globe)
• Federal court proceedings have been dramatically slowed and the number of federal law enforcement and probation officers has been reduced, jeopardizing public safety, according to an unusual letter to Congress signed by the chief judges of the trial courts in 49 states (every state except Nevada). (Sherman, M., 8/15/12, “Judges urge Congress to avoid more sequestration cuts,” The Washington Post)
• The FBI will shut its headquarters and offices on 10 weekdays over the next year, leaving only a skeleton staff on duty. Off-duty employees will not be paid for these days. Given that personnel costs are roughly 60% of the agency’s budget, this was deemed the most effective way to cope with the sequester’s budget cuts. The FBI also has implemented a hiring freeze that means it has 2,200 vacant positions. Training has been substantially cut and no new vehicles are being purchased. There are concerns that employees will leave for better pay in the private sector, that investigations will be slowed, that domestic intelligence gathering will be harmed, and that the FBI’s capabilities will be degraded over the long-term. (Schmidt, M.S., 9/12/13, “F.B.I. plans to close offices for 10 days to cut costs,” The New York Times)
• The National Institutes of Health is cutting $4 million from the $9 million core contract for the Framingham Heart Study, one of the most important and unique research projects in medical history. Over the past 65 years, data from the study has been used to develop and test technologies and treatments that have saved millions of lives and hundreds of billions of dollars in health care costs. The study has monitored the health, lifestyles, and medical treatments of 15,000 people and 100 of the original participants are still alive and being followed, as are multiple generations in some families. Thanks in part to the Framingham study, deaths from heart disease have been cut by more than 70 percent over the past four decades. The study was the first to link smoking and stress to heart disease and identify cholesterol and obesity as risk factors for heart problems. In fact, the very term “risk factor” or “factors of risk” was coined by Framingham researchers. The study will continue, but researchers will be laid off and participants will answer health questions by phone instead of having an in-person medical examination by a doctor. The ultimate effect on the study and the costs to our health and health care system in terms of discoveries delayed or never made is unknown. (Gellerman, B., 9/11/13, “Sequester Puts 65-Year-Old Framingham Heart Study In Jeopardy,” WBUR)
• The decline in federal money for scientific research has been exacerbated and 67% of 3,700 scientists surveyed reported receiving less federal grant funding for their research than 3 years ago. 55% reported they have a colleague who has lost or is about to lose his or her job, and 18% reported they are considering taking their research to another country. (Steinstein, S., 8/30/13, “Nearly 20 percent of scientists contemplate moving overseas due in part to sequestration,” The Huffington Post)
• The Coast Guard has cut patrols, training, and purchases of new equipment. (Gellerman, B., 8/6/13, “Coast Guard Pilots In Mass. Feel Sequester Pinch,” WBUR)
• Efforts to remove unexploded land mines left behind in former warzones have been canceled or curtailed. (Bender, B., 8/3/13, “Home front impasse has distant victims,” The Boston Globe)

 My next post will list additional effects of the sequester’s budget cuts.