Switch to Desktop Site
 
 

'Sequester' harm to economy? Maybe for longer than you think.

Economists say spending cuts from the budget sequester will slow growth in the GDP somewhat in the near term. But a new analysis says a reduction in innovation could double the long-term impact.

Image

The US Capitol Building is pictured in Washington, Wednesday. Pressure is mounting on Congress and the White House to find a way to avoid a package of $85 billion in across-the-board spending cuts, known as the 'sequester' due to take effect on Friday.

Jason Reed/Reuters

About these ads

Scheduled cuts in federal spending could deal a sizable blow to the US economy this year, but won't tip the nation into recession.

That's what many economists conclude as they look at the so-called sequester that appears set to squeeze the federal budget starting Friday.

Here's one way to think of it: The gross domestic product has been growing tepidly, at an annual pace of about 2 percent. Prominent forecasters say the sequester, if implemented for the rest of the year, could knock about half a percentage point off that pace -- maybe a bit more, maybe a bit less.

But, some warn, the impacts come in ways you wouldn't expect.

Yes, the cuts would impose a sharp slowdown on defense contractors such as aerospace and ship-repair companies.

And yes, the cuts would pull spending out of the economy in a range of other ways: federal workers having smaller paychecks, fewer low-income families getting child-care subsidies, fewer seniors having access to Meals on Wheels, etc.

But, beyond those immediate subtractions of dollars from the economy, the spending cuts could affect GDP in a longer term way as well.

Many government programs represent investments in the future: in worker skills, in scientific research, and even in such mundane things as helping commerce flow by providing fully staffed air-traffic control towers.

Those programs face cuts, too.

"The most devastating, long-term effects from sequestration will be in innovation, and these could ultimately reduce U.S. GDP by over $200 billion per year," concludes an analysis released this week by economists at the Information Technology and Innovation Foundation, a Washington think tank.

That amount is double the roughly $100 billion in total annual spending cuts that the sequester would impose.

The group's report doesn't argue that federal deficits should be ignored. The sequester originated in federal law as a blunt tool, to ensure that if politicians couldn't agree on a substantial deficit-reduction plan, some spending cuts would be imposed automatically.

Next

Page:   1   |   2

Share