The Effects Of Budget Sequestration Cuts On The US Economy – Guest Post
In 2011, Congress enacted a law in the event that a plan could not be agreed upon to reduce the US deficit. In such an instance, automatic spending cuts across the board would take effect. This is known as the Sequester. These automatic budget cuts are one of the US government’s ways of reducing the $16 trillion deficit. According to the sequestration, some $1.2 trillion in automatic spending cuts will go into effect over the next decade.
The sequestration took effect on 1 March 2013. The politics surrounding federal budget cuts drove deep divisions between Democrats and Republicans, and proponents of government intervention in the economy yielded to allow a halt to what many conservatives labeled egregious spending. President Obama’s administration was quick to point out that reductions in government spending would lead to an unprecedented economic decline.
The short term impact of the sequestration appeared to have little effect on the spending behavior of American households. Additionally, the Dow Jones and NASDAQ continued to soar while the unemployment rate steadily declined in the months following the sequester. This presented economists with a seemingly contradictory picture. However, the mystery was soon unraveled as the lag effect became apparent.
Analysts have likened the sequestration cuts of 2013 to a slow acting barbiturate, rather than a plug been pulled on the economy. Several months later, it is clear that expectations are being tempered ahead of the release of new jobs growth figures, household spending and other economic reports. If investor sentiment was bullish in the months following the sequestration, it is now lukewarm with plenty of room for improvement.
The fact of the matter is that the federal spending cuts account for a relatively small fraction of the total deficit facing the US economy. A figure of $100 billion in yearly spending cuts is hardly substantial when measured up against the $16 trillion in debt that the US government has piled on. In economic terms, this amounts to less than 0.5% in reduced economic activity per year.
The Ripple Effects of Austerity Measures
However, every ripple in the pond eventually makes its way across the entire pond. The economic figures from major corporations from the second quarter of 2013 reflected diminished growth prospects when compared to expectations in the months following the sequestration. The net result of this economic sentiment is that hiring will remain sluggish and growth will continue to be less than optimal.
The reduced pace of hiring continues to be an impediment to robust economic growth. As such, the employment rate is less than optimal and the economy is bordering a recession and a recovery. In spite of all the evidence, the private sector remains strong and that appears to fly in the face of the austerity measures. News & opinion analysts at Binarries.com have weighed in on the post- sequestration debate with articles on the performance of the global commodities markets moving into the 3rd quarter of 2013.
We urge investors not to make rash decisions even at this stage of proceedings. Caution remains the order of the day and this can be seen in lower levels of disposable income as a result of the tax hikes that came into effect during 2013. There is a dual negative that some economists see – less government stimulus in the economy and higher taxation on working class people. While it may appear that the spending patterns of households, by way of retail sales figures, reflects that no changes have taken place as a result of the sequestration, this is also incorrect. What is more of a possibility is that savings have diminished while expenditures have increased. Investors have moved gradually in the direction of diversified portfolios, and are now including more easy to understand and affordable investments such as binary options in their profiles.
The Sequestration and the Defense Industry
Defense spending cuts through the Sequester have generally been viewed as indiscriminate. That is the main problem that several ranking members of the defense industry have alluded to. While the nominal value of budgetary cuts is seemingly insignificant in the broader scheme of things – the fact that these austerity measures took effect is a sub-optimal means of dealing with issues like national defense and homeland security. Many in the industry believe that government should continue to play an overarching role in the allocation of funding to continue programs that are necessary for the country.
There are scores of programs that should have individually been targeted for budget cuts, as opposed to the shotgun-style approach of cutting funding across the board. National security relies heavily on STEM subjects – science, technology, engineering and mathematics. If cuts in education reduce the effectiveness of teaching those subjects, then national defense will ultimately suffer in the long-term. The interconnectedness of healthcare issues, retirement funds and research & development necessitate ongoing funding by the federal government.
Gallup Poll Results Show Uncertainty Among Americans
According to the latest Gallup poll released in Princeton, New Jersey, some 54% of Americans are uncertain whether the budget sequestration has been positive or negative for the economy. Of those polled in March 2013, 30% said it was a bad thing, 18% said it was a good thing and 51% didn’t know enough to say. Four months later, 30% said it is a bad thing, 15% said the sequestration was a good thing and 54% don’t know enough to say anything about the effects of the sequestration.
For many Americans, the effects of the sequester have not been fully felt yet. It is expected that defense cuts will be in the region of 7.9%, while all other sectors will face a 4.6% cut across the board. The impact for many Americans will likely be noticed over the long term, but already many claim to have been personally affected by it. In any event, the private sector continues to show slow but steady progress.
The Obama administration favors closing tax loopholes for the wealthy as a means of funding growing expenditure, while GOP leaders prefer across-the-board spending cuts. With mid-term elections looming, more cooperation, or less cooperation between Dems and Reps may ensue – depending on the mood of the moment.
Brett Chatz is a graduate of the Economics and Management Faculty at UNISA University. He completed post-graduate studies at the University of Haifa. He regularly contributes professional opinion pieces for Binarries.com.