In memory of Dr. Andreas Höfert

Quid est sequester?

| Tags: Andreas Höfert

Living again in the US, I am experiencing the second week of the “sequester,” which started 1 March. So far there are no perceptible effects. Well, flights are delayed, but flights in the US are frequently delayed, especially out of New York’s ancient airports. In short, hell has not (yet) broken loose.

So how can we reconcile the ongoing political posturing with my perceived reality? Before we answer that we need to address another question for those not following the US debates: what does “sequester” actually mean?

American politicians seem fond of rare words. I have always been fascinated by the term filibuster, which calls to mind Caribbean pirates but in fact describes obstruction in the US Senate. In recent months sequester has made headlines. It evokes Roman jurisprudence but means nothing more than automatic public spending cuts.

Those cuts were activated because a supercommittee of Democrats and Republicans couldn’t agree on deficit cutting measures in 2011, or anytime thereafter; which is hardly surprising given the rift between the two parties on the 2013 budget, the debt ceiling and nearly everything else related to US government finances. If applied in full over the course of the year, the cuts are projected to lower federal government spending by 55 billion US dollars, or 0.3% of 2013 GDP.

This number, which might seem large at first glance, requires context. The most recent projections of the Congressional Budget Office put the US public deficit for 2013 at 845 billion dollars. Moreover, the current quantitative easing program of the Federal Reserve is injecting 85 billion dollars of fresh money into the economy every month. There is also the national debt to consider: as I was walking to work past 44th St. on Avenue of the Americas, the National Debt Clock was displaying the latest figure: 16,686 billion dollars (or 106.7% of GDP), which rises by a million dollars every 45 seconds.

Currently, the sequester’s effects are barely being felt. Many government agencies have apparently accumulated cash, have already committed to spending at certain levels, or will need time to determine where/how to trim their budget. For example, the Department of Defense plans to start furloughs (mandatory time off work with no pay) and implement cost cuts in April. So in the short term, the sequester won’t markedly harm growth.

However, the longer lawmakers take to reach a deal, the greater the risk to the economy. The current continuing resolution, which funds the government, expires on 27 March; without an agreement the government would have to begin shutting down non-essential operations thereafter. Most commentators expect lawmakers to dodge this fiscal bullet and find a compromise that retains the sequester spending cuts while giving government agencies more flexibility in carrying them out. However, the debt ceiling is not likely to be lifted further – enforcement of it was suspended until 18 May, and the US Treasury will be able to operate under it until July or possibly August by using extraordinary measures.

The major risk is of a protracted government shutdown. Under the assumption that one third of federal employees would be furloughed during it, every week it persisted would curtail real GDP growth by an annualized 0.2–0.3%.

The indirect effects on growth are harder to estimate since they involve assessing how financial markets, businesses and consumers would react. The magnitude of the impact would very likely rise the longer the shutdown lasted, as it would call into question the government’s very ability to solve tough fiscal problems. For the time being at least, market participants seem confident that the sequester is just another case of political brinkmanship being played out. Since the severe consequences of the sequester haven’t appeared yet, no one seems really to care about it.