Looming Spending Cuts Would Hit Hard All Over

Play associated audio

Tax increases are only a part of what lies ahead if Congress can't come to an agreement to avert the fiscal cliff by the new year. Massive spending cuts will also kick in — and those cuts will be felt throughout the economy.

The current stalemate got under way two years ago when Congress, locked in a bitter partisan battle over whether to extend the George W. Bush-era tax cuts, passed what was known as the Budget Control Act of 2011.

If Congress couldn't resolve its spending battles by the end of 2012, the law said, there would be what are called "sequester cuts" — automatic, massive reductions in nearly every part of the budget.

Across-The-Board Cuts

Cary Leahey, senior adviser with the consulting group Decision Economics, says the cuts affect both good programs and bad.

"Each particular program which would be affected would all be cut pretty much by the same percentage amount," Leahey says. "And it would not be done rationally — it would just be done that you cut all programs the same."

Altogether, the cuts would eliminate more than $110 billion in federal spending in 2013 alone. Nearly half of that would be in defense spending. But there would also be cuts in education, health care and law enforcement. Much of that money goes to the states in the form of grants.

"State budget officers and policymakers have already had to make a series of really serious decisions on balancing their budgets," says Ingrid Schroeder, director of the Fiscal Analysis Initiative at the Pew Center on the States. "This is going to add a whole other layer of complexity to some already tough decisions that they've made."

'You're Going To Feel It'

Schroeder says states like Virginia and Maryland, which depend heavily on federal spending, will take a hit, as will states with a strong military presence, like Hawaii. Former Federal Reserve Vice Chairman Alan Blinder says cuts in defense spending have a way of spilling over into the rest of the economy.

"If you run a business near a military base — a cafe, a grocery store, a bowling alley ... a restaurant, anything — and the military base has meaningful cutbacks in spending, you're going to feel it as a civilian," Blinder says.

But even without this kind of spillover effect, Blinder says the looming sequester cuts will slow the economy at a time when it's already weak. He says the cuts could reduce economic activity by anywhere from 0.7 percent to 1 percent.

And a 1 percent reduction in economic activity, he says, means about a 1 percent cut in the labor market.

"And 1 percent of employment in the United States now is roughly 1.3 million jobs," Blinder says. "That's not good."

A Little 'Wiggle Room'

Blinder notes that the cuts won't necessarily happen right away; the government, he says, has some wiggle room about when it implements them. So if the two sides are close to an agreement on Jan. 1, they can stall a bit. But he also says the window for solving the dispute is closing.

"My judgment would be that if this is not settled by the second half of January, we're going to feel severe effects on the economy."

And there are signs the effects are already being felt. Leahey, of Decision Economics, says companies need time to plan when they bring in new people — and that they may already be holding back on hiring in anticipation of the cuts.

"So if the numbers for this Friday's employment report are dismal, it may not be [due to Hurricane Sandy] — it may be preparing for these sequester cuts," Leahey says.

All of this will be happening at a time when consumers are already feeling the bite from higher taxes — and that could be an even bigger problem for the economy.

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

WAMU 88.5

Dick Van Dyke: "Keep Moving"

Dick Van Dyke has been charming audiences for generations. In a new memoir, the actor explains how he stays in touch with his inner child and why life gets better the longer you live it.


King Of Beers: SABMiller Agrees In Principle To Merger With Budweiser Brewer

If the deal is formally agreed upon, the company would own around 31 percent of beer sales around the world.

LIVE CHAT: Join NPR's Politics Team For The Democratic Debate

Join us over on Twitter during the debate by following and contributing to #nprdebate or @nprpolitics, or post your comments, questions and observations here.
WAMU 88.5

Global Security Threats Posed By The Increasingly Sophisticated Tools Of Cyberwarfare

The U.S., Russia, China, Iran and North Korea have emerged as major players in the new world of cyberwarfare. With a panel of experts, we discuss global security threats posed by increasingly sophisticated malware and the new digital arms race.

Leave a Comment

Help keep the conversation civil. Please refer to our Terms of Use and Code of Conduct before posting your comments.