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'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.

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

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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.


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