Photo: The U.S. Army on Flickr
When the debt ceiling hike was agreed to in 2011, the GOP demanded spending cuts, which Obama was obviously keen to avoid, especially in a weak economy, and needing to face re-election.So the deal was this.
There would be no spending cuts until 2013, and even those spending cuts would disappear if a “super-committee” could come up with a long-term deficit reduction package. The premise of those 2013 spending cuts is that they were noxious to both parties, and that they were bad policy, and so both sides would have an incentive to avoid them.
Well obviously the super-committee failed to avert them, and there’s a growing consensus that in the next few weeks, they won’t be avoided. The GOP, which has thirsted for cuts for a long time, is basically sticking a flag into the ground, saying the sequester will happen. Game over.
Last week, Tom Philpott writing in military newspaper Stars & Stripes, had a brutal editorial on what the sequester meant for the armed forces:
Congressional leaders appear to have reach consensus that it is safer politically to allow deep and arbitrary cuts to military budgets than it is to negotiate a large debt-reduction deal that would have names attached.
With Republicans and Democrats unwilling to make difficult decisions to address budget deficits in a balanced way, the military is being forced to cut training, cancel construction projects, defer maintenance of ships, aircraft and vehicles, cancel professional conferences, halt most temporary duty assignments, and interrupt supply and equipment purchases.
Quality of life for the military also is being impacted as dependents lose jobs, local economies and businesses lose contracts, and base operations, including family support programs, take immediate budget cuts.
The entire Department of defence has imposed a civilian-hiring freeze. At least 46,000 temporary employees are getting pink slips and many more employees under “term” contracts won’t see those contracts renewed.
Part of the reason for the frustration is not just the cuts per se, but rather the arbitrary nature of them, hence the lopping off of activity across the Department of defence.
In his Morning Money letter today, POLITICO’s Ben White writes that from the view of DC insiders, the sequester remains on.
SEQUESTER STATUS: STILL HAPPENING – Consensus among insiders remains that the sequester cuts will hit, at least temporarily, but could get modified or changed in a deal later in March that wraps in the continuing resolution funding the government. But there is still little clarity on exactly what Republicans will push for in terms of spending cuts in any final deal or what precisely they will use as leverage. Whatever the case, weeks of posturing remain and nothing will get done until the last possible moment.
While a military drawdown may be justified, the rapid, across-the-board cuts will have a negative effect on the economy.
Remember, just last week we got the worst GDP reading since the crisis, thanks to the fastest drop in military spending since 1972.
Photo: Bloomberg, Business Insider
The increased likelihood of the sequester has caused Goldman’s Jan Hatzius to change his roadmap for GDP.
The good news is that he still sees no recession:
We expect the US economy to move over the hump of fiscal contraction in 2013-2014. This hump looks even more front-loaded than when we rolled out our forecast late last year. We now expect a more rapid ramp-up of the federal spending “sequester” by late 2013, compared with the more gradual phase-in that we had assumed earlier.
We have adjusted our real GDP growth forecasts to the changes in the fiscal assumptions and the economic data. We now expect a rebound in real GDP growth to 2.6% in Q1 as the one-off drags unwind. The more front-loaded sequester is likely to push growth down to 1½%-2% in Q2/Q3, ½ point less than our prior forecast. However, we expect growth to accelerate thereafter to around 3½% in most of 2014.
Of course, with both the tax part of the fiscal cliff and the debt ceiling, people went in with a lot of pessimism, and things turned out alright. We still have some time before March 1 to get this taken care of.
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