POLITICS MARCH 1, 2013
The automatic budget cuts of "sequestration" are starting to take effect, but most Americans probably aren't going to notice right away. The lines at the airport won't be longer on Saturday and the border gates to Canada and Mexico won't suddenly fling open. Officers from the Federal Bureau of Investigation and inspectors from the Agriculture Department aren't walking off the job. Come Monday, parents will be able to send their kids to Head Start and college students will be able to get their loans processed, just as they always have.
Folks like Rush Limbaugh, who has already likened sequestration to the Y2K scare, will likely take the lack of discernible effects as proof that the government can operate on a lot less money. They will be wrong. The cuts won't affect services immediately only because, by law, they can't.
The federal government must give 30 days' notice before reducing direct payments, such as Medicare reimbursements and supplemental unemployment benefits. It must also give 30 days' notice before asking workers to take furloughs. Meanwhile, individual agencies have some discretion over when cuts take place, even though they don't have discretion over what the cuts are. "For a few weeks, any halfway competent agency is going to be able to keep things running more or less as they have been recently," Matthew Yglesias wrote recently in Slate. "Big shortfalls in services would only show up later down the road."
Of course, before that happens, another policy event may intervene. Because the congressional budget process has broken down, the government relies on what's called a "continuing resolution" to spend money. The existing resolution expires on March 27. Without it, government can't operate. Democrats and Republicans remain far apart on how to renew it, essentially for the same reason they can't agree on a replacement for sequestration: Democrats want a mix of revenue increases, spending reductions, and temporary job stimulus. Republicans want nothing but spending reductions, preferably including substantial cuts to entitlement benefits. A full government shutdown is a very real possibility. One way or another, the likely outcome is a deal that not only gives the government new spending authority but also deals with the sequestration cuts—through some combination of repeal, delay, or substitution.
But the sequestration cuts are likely to damage the economy even if Congress ends up repealing them outright. In fact, they are probably damaging the economy already. Furlough notices started going out to some federal workers on Friday, according to news accounts. People who get them are going to react. Some will take the threat more seriously than others, obviously, but given the uncertainty—not to mention the real possibility that some cuts stay in place—some people are likely to change their financial behavior. Maybe they'll rethink a major purchase or delay maintenance that can wait a few more weeks. And what's true of individuals is even truer of large organizations, including those in government and those outside. Managers of these organizations frequently have long planning horizons and will adjust plans accordingly. As Josh Barro writes at Bloomberg, "The sequester will force households and businesses to operate in an environment where they don't know what government spending is coming; some will cut back on consumption and then get the payments they expected all along."
This isn't speculation. It happened once already—in December, the last time sequestration cuts were imminent. The economy suddenly slowed late last year, according to government estimates, and the single biggest reason was a sudden contraction of defense spending. The reason those expenditures fell was that the Pentagon, anticipating cuts, began slowing down purchases and other expenditures. You can bet they'll be doing the same thing now. So will the people who run Head Start programs or public schools heavily dependent on federal funds. So will the people who provide business or contract services to a wide variety of agencies. The effects of sequestration may not be immediately visible to Rush Limbaugh or to the majority of Americans, but in some ways that makes them even more dangerous.