Sequester Stress

(Cartoon courtesy of the Columbia Tribune)
(Cartoon: John Darkow, Columbia Daily Tribune)

With both the House and Senate out of session this week, only four days remain for lawmakers and the White House to agree on a plan to reduce the deficit in order to avert sequestration—the $85 billion in across-the-board spending cuts (this year) required by the Budget Control Act of 2011—from going into effect on March 1. Although nearly all parties have called these cuts “dumb,” the chances of their coming to an agreement to avoid them are slim to nonexistent.  As Erskine Bowles put it yesterday (Tuesday, February 19) at a Politico breakfast forum, “the idea of a grand bargain is at best on life support.” While Bowles and Alan Simpson, the former co-chairs of President Obama’s debt commission, were presenting a reworked bipartisan proposal for fiscal restraint, the president and House Republican leaders appear to be abandoning all attempts to reach a compromise.

Assuming sequestration does go into effect, what impacts can we expect it to have on the federal government and the economy? The process clearly will hit different regions, states and metro areas in different ways, and the outlook is particularly grim for the National Capitol Region. With federal spending making up a whopping 19.7% of state GDP in the District of Columbia, Maryland and Virginia, this area will be stung by both defense and non-defense budget cuts, which will amount to approximately 13% and 9%, respectively. According to a study conducted by George Mason University Professor Stephen Fuller last summer, the Washington, D.C., region alone could lose nearly 450,000 public- and private-sector jobs.

Defense cutbacks are expected to have the greatest immediate impact, particularly in states and regions with a strong defense presence and large defense contractors, including the National Capitol Area, Hawaii and Alaska. Other areas particularly vulnerable to defense cuts include Huntsville, Ala., and St. Louis—both of which have oversized exposure to the aerospace industry—and smaller cities with large military bases, which are particularly reliant on defense dollars. DoD leaders have already indicated that defense cuts will result in furloughs, smaller defense contracts, reductions in military personnel and, perhaps, another round of base closures—as well as spillover impacts on the broader economy, including reduced wages, higher unemployment and more.

The impacts of non-defense cutbacks are expected to be less regionally concentrated. Once again, however, the District, Maryland and Virginia will face significant impacts. These cuts will affect all non-defense federal agencies (and the industries they regulate) as well as many government contractors, hospitals and research institutions throughout the nation. We expect to see significant furloughs of federal workers, layoffs at government contractors and reduced business for support services such as law firms, airlines, hotels and other companies of all types and sizes. Furloughs of USDA food safety inspectors, for example, can be expected to result in temporary shutdowns of meat processing plants. Planning for sequestration already is having an impact on some agencies, businesses, and state and local governments. For example, to conserve funding to prepare for sequestration, NIH has been approving only 17% of grant applications (rather than the usual 25 to 35%), and last September Fairfax County, Va., set aside $8 million as a buffer against projected federal cutbacks.

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