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Economists See Budget Cuts Putting The Recovery At Risk

Evening Edition

Above: Carl Luna, a political science professor at San Diego Mesa College, and Marney Cox, the chief economist at the San Diego Association of Governments, talk to KPBS about the potential impacts of sequestration.

Aired 2/28/13 on KPBS Midday Edition.

GUESTS:

Carl Luna, Political Science Professor, San Diego Mesa College

Marney Cox, Chief Economist SANDAG, San Diego Association of Governments

Transcript

Getting economists to agree with each other isn't easy. But Congress and the White House have managed to unite them.

Getty Images

U.S. President Barack Obama speaks during a visit to Newport News Shipbuilding February 26, 2013 in Newport News, Virginia. Obama spoke on the impact from the sequester would be for the defense industry and its workers.

More than 95 percent of top U.S. economists believe growth is "likely to be negatively affected" by the automatic federal spending cuts that are scheduled to kick in Friday, according to the latest survey by the National Association for Business Economics.

Federal Reserve Chairman Ben Bernanke joined the economists' chorus Tuesday, telling Congress that the spending cuts' harm will be "significant," with "adverse effects on jobs and incomes."

Americans nodded in agreement. A poll by the Pew Research Center and The Washington Post finds that by a margin of 62 percent to 18 percent, people think the sequester will have a mostly negative impact on the economy.

This nearly universal disdain is being directed at the blunt budget ax known as sequestration. Unless Congress takes action, across-the-board cuts, effective Friday, will chop $85 billion in federal spending over the seven months remaining in this fiscal year. Half the cuts must come from the military and half from "discretionary" domestic programs, such as those involving medical research and border patrol.

But while economists are clear that sequestration will cost jobs and depress growth, they differ over how long the harm will persist, and how deep the damage will be.

The nonpartisan Congressional Budget Office offered a typical assessment, estimating that the cuts will knock 0.6 percentage point off the annual growth rate and cut 750,000 jobs by year's end.

In the NABE poll, most economists agreed with that ballpark estimate, figuring sequester will shave roughly a half-percentage point (or maybe a little less) from this year's gross domestic product. In other words, instead of growing at a rate of, say, 2.9 percent in 2013, the GDP might expand at only 2.4 percent. That's enough to retard job growth, but not to derail the recovery.

But some economists are much more worried. In the NABE survey, a third of economists see more harm coming than the CBO does, and 13 percent fear growth could be cut drastically — by more than a full percentage point. Given that in 2012, the U.S. economy grew just 2.2 percent, losing a full percentage point could put the economy on track for another recession.

Some conservative economists, however, have a more sanguine outlook. While agreeing that growth will take a brief hit, they say it's better to cut spending now — even if with an ax — rather than do nothing as federal borrowing grows to unsustainable levels.

Besides, in a $16 trillion economy, the budget cuts would sting for a bit but "would not amount to a lot, especially since the private sector appears to be picking up more steam," Gary Becker, a conservative economics professor at the University of Chicago, wrote on his economics blog.

No matter how things turn out in the long run, this much is clear: Friday could be a depressing day for people who earn their living with the help of government funds. Threatened workers would have to start bracing themselves and reducing personal spending — even if it takes a few weeks for the sequester cuts to make their way through the funding pipeline to finally smack them.

In general, economists are concerned about four big areas of impact:

The Military

Half of the coming cuts, roughly $45 billion in this fiscal year, are concentrated in the defense sector and aimed at private contractors, such as those involved in replacing the aged aerial-refueling tankers or maintaining ships. Last week, the Pentagon notified Congress that it may have to furlough some 800,000 civilian employees, asking them to take a 20 percent pay cut — by staying home one day a week without pay through this fiscal year.

Travel

At a media briefing, Transportation Secretary Ray LaHood said he would institute unpaid furloughs for air traffic controllers, which could cause "delays of up to 90 minutes during peak hours" at major airports. Also, the Transportation Department would have to shutter more than 100 air traffic control towers. Disruptions at popular destinations might also depress travel. Just one example: workers at Yosemite National Park will have to put off plowing snow from the road leading into the park, leaving many visitors stranded until the snow melts.

Local Government

Many jobs related to law enforcement and emergency response rely on federal funding. For example, the Federal Emergency Management Agency would cut grant funding that supports firefighter positions and emergency-management personnel. About 1,000 FBI agents and hundreds of federal prosecutors also could lose jobs or be ordered to take unpaid furloughs, which could undermine local crime-fighting efforts. Title I education funds also would be cut for more than 2,700 schools, putting the jobs of about 10,000 teachers and aides at risk.

Consumer Confidence

The coming job cuts and unpaid furloughs could reduce consumer spending at a time when many people already are feeling squeezed by higher payroll taxes and gas prices. In a written assessment of the latest consumer data, Chris Christopher, director of consumer economics for IHS Global Insight, said rising confidence could quickly reverse. "Rising gasoline prices and the sequester are on many households' radar screens," he said.

KPBS' Alison St John, Patty Lane and Peggy Pico contributed to this story.

Comments

Avatar for user 'philosopher3000'

philosopher3000 | February 28, 2013 at 12:50 p.m. ― 1 year, 8 months ago

The idea that our National Debt is at 100% of GDP is a fallacy, the purpose of government is to protect our security. We should be producing at twice this level or more, and if we were, we would have twice+ the tax revenue. The reason we ARE NOT producing at that level, is because the Banking Crisis has sucked all the capital investment out of the economy, shunting it into the hands of the rich, who are squirreling all their profits into treasuries and overseas investments, rather than reinvest in our declining economy.

The solution is to hire US Workers, and since there is no profit in that, the Federal Government is the employeer of last resort. We should be spending at least $2-Trillion today on building a sustainable, national renewable-energy infrastructure. Training and hiring millions of US Citizens directly. No job should pay more than $100,000/year, and none of those 'no-bid' Halliburton contracts, no bonuses for CEOs, etc.

By pouring money into the base of the economy, we will restart the economic engine with fuel for consumers to buy their basic needs. Just as FDR built the national transport and energy infrastructure in the 1930's. The Federal Deficit is decreasing, we are getting out of the business of destruction, and we need to get into the business of creation.

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Avatar for user 'Kubota'

Kubota | March 1, 2013 at 2:11 p.m. ― 1 year, 8 months ago

In San Diego we’re headed for a double whammy, sequestration and cancelling our entire destination adverting campaign for spring and summer. Why is destination advertising important? Tourism is a largely service industry which has employment at its base and provides jobs that can’t be outsourced. In fact, it employs 160,000 people in San Diego. There’s a lot of talk about “big hotels” being the only benefactor of destination marketing, but when tourist come here they don’t just stay in their hotel rooms, they go out to restaurants, museums and attractions, they ride in taxi cabs and shop in retail stores. Ask the local brewery, harbor cruise or neighborhood bed and breakfast how important it is to advertise San Diego. Tourists create jobs which in turn creates tax revenue. If San Diego wants to better weather the storm of sequestration, it shouldn’t kill the goose that lays the golden egg.

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