Another last gasp act of desperation with another last gasp meeting at the White House, this time with expectations lower than ever before, and predictable results to go with it. President Obama and congressional leaders met for an hour Friday morning and made zero progress on striking a deal to avoid the automatic sequestration cuts to the budget. Their respective statements afterward tell the story:
Obama: "Let's be clear: None of this is necessary. It's happening because of a choice that Republicans in Congress have made. We shouldn't be making a series of dumb, arbitrary cuts to things." He warned that while not everyone will feel the cuts initially, "the pain ... will be real."
John Boehner: He made clear that Republicans will not budge on tax increases as part of the president's "balanced" approach. "The president got his tax hikes on January 1st. The discussion about revenue in my view is over. It's about taking on the spending problem here in Washington." He added that the House would put forth a continuing resolution next week to fund the government beyond March 27 to avoid a shutdown.
Sometime today, Obama will notify government agencies that sequestration is in effect, and the resulting cuts will begin to take shape in the coming days and weeks.
Reaction among voters? Maybe we're just tired of the Fiscal Cliff Theater. The script is the same: One side offers only cuts. The other side offers a combination of cuts and revenue increases by way of eliminating tax loopholes. One side says the economy will take a serious hit from the spending cuts; the other side says bring it on by using simplistic math to argue that the cuts aren't that large. Each side blames the other.
Even economists don't agree on the impact of sequestration, and that seems to fall more in line with their politics. Michael Boskin, a professor at Stanford and an adviser to presidents for decades, told Congress on Thursday "it would take quite a stretch to make this into a macro-economic event."
The University of Chicago's Austin Goolsbee, the former top economist for President Obama says sequestration will cut the growth rate enough that "there's a decent chance the unemployment rate goes back up again."
The difference of opinion has to do with an economic principle called a "multiplier," something you rarely hear anyone talk about. That's simply the ripple effect of how many cuts in government spending will have.
It's pretty simple: Take a government contractor. If his contract gets hit by the government cutbacks. It can mean he doesn't hire an extra worker or two, or brings his lunch instead of buying it at the local diner, whose management then has less money to hire another waitress. In other words, he don't get it, so he don't get it, so she don't get it, so they don't get it, and the flow of money is stopped (which, through taxation, leads back to the government) --an indirect impact of sequestration on the economy.
The Congressional Budget Office uses a multiplier of 1.5: For every dollar of cuts to government programs, they figure there will be an added 50 cents in negative ripple effect on the economy from things like not eating out, or hiring one less employee.
So there are two calculations: Direct government spending, and the multiplier. The CBO says that between today and December 31st, direct government spending will fall $66 billion because of sequestration. They then multiply that by 1.5, so by their calculus, the sequester will result in a $96 billion-dollar hit to the economy. Most Americans can't see beyond an hour-long prime time drama, let alone project potential problems nine months into the future.
Federal Reserve Chairman Ben Bernanke told Congress earlier in the week that this multiplier would cost sixth-tenths of a percent in growth in 2013, and about 750,000 jobs. And Bernanke pointed out that the recent deficit reduction deals between the president and Congress involving $2.5 trillion in tax hikes and budget cuts are already putting a drag on the economy equal to, Bernanke says, 1.5 percent growth. That's left the economy growing at just two percent a year. (Three percent tends to be minimal acceptable growth.)
No one really knows the impact of shaving another half percent will have on the economy, but most economists, including Goolsbee and Boskin, agree that it won't lead to another recession. Frustrating as it is, we're in uncharted waters. Furloughs of FDA meat inspectors or TSA workers have never happened before, and that's got some economists worried about the chaotic nature of the cuts, cuts that aren't captured in the multipliers used by the CBO or most forecasters, which means the economy would face even stronger headwinds than expected.