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Economists See Budget Cuts Putting The Recovery At Risk

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.
Alex Wong
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.
Economists on Sequestration Impact
Economists See Budget Cuts Putting The Recovery At Risk
GUESTS:Carl Luna, Political Science Professor, San Diego Mesa CollegeMarney Cox, Chief Economist SANDAG, San Diego Association of Governments

ST. JOHN: You're listening to Midday Edition here on KPBS. I'm Alison St. John. Sequestration appears to be inevitable, and we're still struggling to come to grips with what it really means. It seems Congress cannot even achieve agreement to a continuing resolution until sequestration has gone into effect. Here to help us tease out the significance of this, Carl Luna, political science professor from Mesa College. Thanks for coming in. LUNA: Good to be here. ST. JOHN: And Marney Cox, senior economist at SANDAG. Thank you. COX: Thank you, Alison. ST. JOHN: So let's start with you, Carl, what is your assessment of what's going on in Washington right now? It's getting increasingly hard to get a grip on the reality. Is this really a crisis or a political bluff? LUNA: If this was 1950s France, Charles de Gaulle would be stepping in saying it's time to claim a new republic and abolish the old system. We're reaching a level of crisis to crisis that I don't remember in my lifetime. The two parties simply can't reach compromise the way the system demands them to do want ST. JOHN: So Marney, would you say this political crisis is just brinksmanship or are we going over the brink? COX: We're going over the brink, it will hurt the economy. There's a short-run story and a long-run story. ST. JOHN: Okay. Well, unravel that. We'll keep going with this economic question. Why is it that the short-run perhaps may not be the biggest issue? That's what we've all been talking about. Is someone going to lose their job tomorrow? There's a lot of jobs at the shipyards that may be threatened. COX: From a numbers perspective, originally it was thought about an $85billion cut. But because programs go over more than one year, it looks like it might be a $42 billion cut. The uniform military spending being held exempt. So if you think about San Diego, we get $16 billion or so, $13 billion of that comes through the defense contracts and the uniformed military. We're left with about $9 billion that are defense contractor, that's the part that could be hurt. That's the part that will actually lose jobs. For San Diego, it will be a real thing. There are more defense contractors here in San Diego than there are generally in other parts of the United States. So we'll have concentrated impact business in the short-run. ST. JOHN: You warned in the past that San Diego needs to avoid putting too many eggs in the military basket because we could get caught out when their funding is cut. Is this happening again? COX: Yes it is. And this is the very point about sort of not being in control of your economy, decisions made elsewhere are coming back to hurt you, and almost in an unexpected way, although we have had a year to think about this, I don't think many changes have occurred or probably not enough change, so there will be actual jobs lost. ST. JOHN: So why is it that we hear mostly about cuts to the military? I mean, I know there's 8% for the military, and less for other things. COX: Right. ST. JOHN: But why don't we hear so much about cuts to which I thinks like childcare and senior meals? COX: Well, the military is going to take 50% of the brunt of the hit in that first year. The other $20 billion is spread out across the entire United States, and it's lot of different programs. But the other 300 million people that live in the U.S. may be sharing it. ST. JOHN: Why is it that we're not hearing from the people who even if we're sharing it across the nation who are going to be hurt? LUNA: Because they don't know they're going to be hurt. The bottom line is according to polls, this is still -- people are talking about the Oscars still. They're talking less about sequestration, and they've heard about we're going over the cliff for months and months. Now we're actually going over it, and will take time for this to work its way through. But there's pain for everybody, and San Diego gets a disproportionate share because of the military. We're heavily into research, and that's going to be affected. We're a border city, that's going to be impacted in terms of border security, border wait, airport may be impacted. Like a frog in boiling water, sometime around September, October, November, we're all going to be going ouch! We could lose 20% of our economic growth nationally and locally. And that's thousands and thousands of jobs. ST. JOHN: Carl, politically, what would need to happen to avert this? LUNA: It's not going to be averted now. Over the next month because we have another cliff coming up with the debt ceiling, Congress testimonies the president to spend money. Now they're telling him to spend less with sequestration but they haven't authorized the money that we're all spending. And at the end of the month, we may say by the way, we spent all this, but we're not going to pay for it. ST. JOHN: That's the continuing resolution? LUNA: No, that's the debt ceiling increase. And you've got to have a continuing resolution. We're no longer able to put a budget together. So the continuing resolution says we'll continue spending at a set rate until we get a budget together. We're messed up under sequestration, the continuing resolution, the debt ceiling. ST. JOHN: There was a very interesting quote from Juan Vargas who's new in Congress who said in Sacramento where he came from, you would always have adults negotiating behind the scenes. Now he's in Washington, you look behind the curtain, and there's nobody there. That was a very telling quote. Do you think there is anything going on behind the scenes that could help resolve this? LUNA: I think within the Congress and possibly disproportionately on the house Republican side, there's a lot of getting ready to do the finger-pointing to blame the other side for political advantage. One of the difficulties we have is most of the members in Congress aren't going to be fired over this. So they're trying to reinforce their ideological positions so they can get reelected in two years. The Senate is more driven to compromise. Right now, the Congress between the house and the Senate is pointing at the president, the president laid his plan out, the Senate has a plan, the house has a plan, but nobody is working to negotiate it because a lot of people believed they reached the compromise they were going to reach in January when you avoided the sequestrations and kicked them off if are two months and got the $400billion tax increase. Republicans don't want to give more, and Democrats still want to get more out of the deal. ST. JOHN: So Marney, you talked about timing, the timing of this. We have had guests in this week already talking below, just one of them compared this to something that's more like a mudslide than a cliff. And another analysis said the worst pain will be this year. Then as it goes on, the pain will be less because the initial cuts will hurt the most. COX: There's a little truth in the mudslide concept. But remember that the money we're talking about cutting is 50% Department of Defense, so that builds aircraft carriers and bombs, but it isn't really used in the economy to build growth for the next year. It's sort of a dead end, right? You and I don't use an aircraft carrier in our normal line of work. Protects from all those bad things that can go on, but it doesn't help the economy. Once we transfer the money, spending on defense goods over to the private economy, then there's actually earnings and profit allowed back into the economy. Your economy is better off in the long run, meaning 1-3 years after the cuts have taken place. You're back on a trajectory that's greater in growth than the one that you left. So right now, we're having trouble with our economy growing fast enough, putting people back to work. This will help 1-3 years down the road to get us at a higher level of growth, creating more jobs and reducing the unemployment rate faster than today. LUNA: I'm not so certain that's going to be the case though. This sort of sequestration at this level hasn't been done before. There are lots of multipliers and different levels in this in a global economy which is shaky at best. This level of uncertainty for how Congress is going to resolve, it's going to cause problems, reduce overall consumer consumption, and put money back in the private sector if there's money to move. I'm afraid you lose more growth in an Apeoplic economy. This is probably not the best time to lose leaches to bleed the body politic. ST. JOHN: Marney is saying the military is sort of a dead end investment, it's not feeding back into the economy. Is there a possibility that by some pain to the military, which will hurt San Diego, that other elements of the economy might benefit? LUNA: Over the long-term, you're going to move the money that doesn't get spent on defense, the assumptions is it will remain in people's pockets. But the multiplier for government -- I don't know there's a guarantee you're going to see investment in the San Diego economy as a result of spending cuts. That money can go elsewhere if it doesn't just go into safe investments. There's $2 trillion in money sitting around in corporations and banks that's not being loaned out and invested because of uncertainty. I'd like to see that invested before I worry about multipliers that are coming from other places. COX: Yeah, I think we need to take under consideration one of the biggest problems we have with the deficit spending. We're spending more than what we're earning. The concept here is once you put it back into a situation where there's earnings, there's profits, you're no longer spending more than what you're earning. You can't continue to spend more than what you earn. At some point, there comes a time when it's due. And I think we found that out in 2005 and 2006. We started to consume more than we earned, beginning in the mid-1990s, and we're spending about 140% of our disposable personal income. It couldn't continue. On the government side, they cannot continue forever to spend more than what they earn. Someone is going to have to pick up that bill. And I agree with Carl about the pain in the short-run, and the longer run getting back to a point where you're only spending what you can earn is a much better place to be. ST. JOHN: This is an interesting distinction. So Marney here is saying in the long run, this could benefit our economy. And Carl Luna is saying no, you think this is the wrong time to be taking this kind of an accident. LUNA: I would say in the long run we're doing better. I don't think sequestration is going to be what got us there. ST. JOHN: Okay. LUNA: When you look at our overall economy, yes, we've been spending more than we're making because wages have been stifled for most households. I've been told since I was in high school that it's immoral to leave this debt to the next generation. My parents left it to me, I'll leave some to my kids. Debt is manageable. We are not Greece. We look at interest rates, they are 1% and 2% because the world is pumping money in here. The deficit is not the biggest problem we're facing right now financially. And the government always has to live within its means? It's never lived within its means. Governments always run debt for the future. Winston Churchill was always in debt. He'd make more money, get out of it, then get in more debt. The debt itself is not the horrific problem, no less than Dick Chaney said in 2002 rate improvement deficits don't matter. And the crisis was not caused by debt. ST. JOHN: You're talking about Greece, do you think this is undermining the American people's faith in their government? It's not Greece whether they're actually electing a party that's headed by a comedian, I understand. How much damage is this doing? LUNA: The process is undermining. The constant hammering on we can't leave this debt to our children when every generation leaves some to their kids. It's the fact the parties have become so polarized. You can't reach an agreement; people are starting to say a pox upon government. And trust in government is at an all-time low. COX: You take a look at the gross federal deficit, it's equal to GDP today. So it's $16 trillion. Carl is right about past deficits or debts that we're leaving. But before this recession started, we were about 40% of GDP in debt. Today we're at 100% in five short years. I don't think that's a manageable level of debt to pass onto future generations to pay back. That's substantial amounts of growth. And we're still continuing. Debts are about a trillion dollars a year. That is how much we collect in personal income taxes each year. The amount we're collecting, personal income taxes from the consumer taxpayers in America is only sufficient to pay the debt that we're going into. LUNA: But the sustainability of debt for a country is based on what they have to pay to borrow the money. We're spending less than 1.5%. The world markets have spoken. That may tick up over time. But there's no place else for people to put their money today. China is not safe. ST. JOHN: 30 seconds, Marney. COX: Interest rates are artificially low today. And what we're seeing is currency wars beginning to occur because everybody is thinking about devaluing their currency to export more. This is escalating to a point where Japan has 200% debt. The entire European community with the exception of Germany is running debt. Spain at about 25% unemployment. Most of those young people, and the United States at 100% debt. So this whole thing has a tendency to unravel itself. These are unprecedented levels of debt. ST. JOHN: We are going to have to have you guys back. We had a lot of questions we didn't have a chance to get to. And I don't think we're going to avert this crisis. You make a good pair! Thank you so much. >> Thank you, Alison. ST. JOHN: And Carl Luna, always great to have you, Carl. LUNA: Thank you.

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

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.


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.

Corrected: June 24, 2024 at 1:40 PM PDT
KPBS' Alison St John, Patty Lane and Peggy Pico contributed to this story.