Macroeconomic Advisers on the Sequester’s Impact

Estimated self-inflicted macro harm, from Macroeconomic Advisers today:

…we now put the odds of a sequestration at close to 50%, and rising.

 

  • Our baseline forecast, which shows GDP growth of 2.6% in 2013 and 3.3% in 2014, does not include the sequestration.
  • The sequestration would reduce our forecast of growth during 2013 by 0.6 percentage point (to 2.0%) but then, assuming investors expect the Federal Open Market Committee (FOMC) to delay raising the federal funds rate, boost growth by 0.1 percentage point (to 3.4%) in 2014.
  • By the end of 2014, the sequestration would cost roughly 700,000 jobs (including reductions in armed forces), pushing the civilian unemployment rate up ¼ percentage point, to 7.4%. The higher unemployment would linger for several years.

 
The macroeconomic impact of the sequestration is not catastrophic. Nevertheless, the indiscriminate fiscal restraint would come on the heels of tax increases in the first quarter that total nearly $200 billion, with the economy still struggling to overcome the legacy of the Great Recession, and when the FOMC is constrained in its ability to offset the additional fiscal drag with a more accommodative monetary policy. …

Here is a graphical depiction of Macro Advisers’ estimates of the impact of the sequester.
maseqpix.gif

Source: Macroeconomic Advisers (2/20/2013).

For more on the sequester, see here and here.

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24 thoughts on “Macroeconomic Advisers on the Sequester’s Impact

  1. 2slugbaits

    I think the impact is likely to be bigger than MA expects. For example, FedEx and UPS shipments will take longer because there will be 20% fewer FAA manhours during the sequestration. Grain barges will spend a lot of time waiting for lock-and-dam passage because the Corps will incur a 20% manhour cut. Grocery stores will have less meat on their shelves because there will be 20% fewer meat and poultry inspections. Passport applications will be delayed. Work at ports will slow down because there will be 20% fewer federal port inspectors. Fewer ATF agents. Fewer FBI agents. Fewer prison guards. Basically, anything that requires a federal inspector to approve something will have to wait a lot longer. Now, for those folks who have studied queueing theory in operations research, what happens to the length of the queue when service times times increase by 20%? If you voted Tea Party it’s a good bet that you won’t get the right answer.
    So where did the 20% manpower cut come from? According to OPM all govt agencies must follow “administrative furlough” procedures for a furlough period of 22 days per employee. Those procedures effectively mean that most agencies will not be able to begin furloughing workers until early May to early June. An early May start date leaves you with 5 remaining months in the fiscal year. An average month has 22 workdays, so there will be a total of 110 workdays. The 22 day furlough period needed to cover the sequestration means a 20% reduction in manhours. Note: OPM recognizes that a 22 day furlough may not be long enough, but since they are planning for a 22 day furlough the rules will allow additional days.

  2. Jeremy

    It seems pretty obvious that the President should look to compromise with hardliners in the GOP and find a way to reduce government spend with minimal impact to the economy.
    However, it certainly appears the President is prepared to behave like a reckless teenage kid playing “chicken” with our economy.
    The President’s desire to ruin the Republican party is an admirable goal (what else shoudld a talented Democrat aspire to) but he will not be remembered for this great achievement if he ruins the country first.

  3. Patrick

    2slugbaits,

    My understanding of queuing theory is rudimentary, but wouldn’t it greatly depend on the current utilization of the process?

    It is probably a solid assumption that the resources of the federal government run relatively tightly towards 1. Assuming the utilization coefficient is 1, a reduction in capacity by 20% returns a coefficient of 1.25. Does the line increase exponentially as a function of arrival at that point?

    It seems to me that through human adaptability the increase in the line would be counterbalanced by a general decrease in quality and increased triage of necessary tasks.

  4. john jansen

    You cite the $200 billion in tax hikes which hit in Q1. Now if the economy is in such a tenuous and fragile state that it cannot absorb the $85 billion sequestration,then why would you have supported and encouraged the $200 billion tax hike. That seems like an even worse fiscal fix than these mandatory cuts.

  5. kharris

    Jeremy,
    Very sly, the way you managed to imply that this problem is all Obama’s fault. Is this your audition to work for Fox?

  6. Anon

    Jeremy, how do you negotiate with a group of hardliners who are basically acting irrationally?
    Look no further than the silly political holdup on Hagel and Brennan’s nominations.
    Benghazi was 5 months ago and no one in the public really gives a hoot about it right now, but they’re still trying to claim Benghazi was worse than Watergate…

  7. Jeremy

    Kharris,
    “Jeremy,
    Very sly, the way you managed to imply that this problem is all Obama’s fault. Is this your audition to work for Fox?”
    ——
    Does it really matter who is at fault when Rome is burning and the President is playing Golf with Tiger Woods?
    The person in charge needs to take charge even if the GOP is making things worse.

  8. signsanssignified

    Jeremy,
    You wrote “The person in charge needs to take charge…” By “take charge” I think you mean surrender. Exactly how does acquiescing to insane budget slashing–with no corresponding revenue increases–at a time of slow growth make one iota of sense?

  9. kharris

    Ah, Jeremy, sly again. Maybe too sly even for yourself. Does it matter whose at fault? I don’t recall raising that issue. You did. My suggestion was that you are being disingenuous, so might have an edge in getting a job at Fox.
    Apparently, it doesn’t matter whose at fault, because you are going to find fault with Obama in any case. Yes, Obama played golf. Goodness knows, we can always find fault with golf-playing.
    We have separation of powers precisely so that no branch of government can exercise excessive influence. In the case at hand, the budget is the problem. Obama is not “in charge” of passing bugdets. That’s down to the Speaker, the Majority Leader and relevant committee chairs. That’s by design. So let’s all find fault with Obama, because it doesn’t really matter who’s at fault, right?

  10. Anonymous

    Let’s take Jeremy’s substantive comment here – “find a way to reduce government spend with minimal impact to the economy”. The only way this occurs is that we have backloaded spending cuts, that is, cuts after we get close to full employment. The Republicans are insisting on front loading any spending cuts. On that – there should be NO compromise.

  11. Ricardo

    kharris,
    Because you probably don’t watch FOX News you probably missed what Bob Woodward revealed about sequestration.
    CHRIS WALLACE, “FOX NEWS SUNDAY” HOST: Bob, as the man who literally wrote the book about the budget battle, put this to rest. Whose idea was the sequester, and did you ever think that we’d actually get to this point?
    BOB WOODWARD: First, it was the White House. It was Obama and Jack Lew and Rob Nabors who went to the Democratic Leader in the Senate, Harry Reid, and said, ‘this is the solution.’ But everyone has their fingerprints on this. (FOX News Sunday, February 17, 2013)
    Also you probably missed that Obama said that he would veto any changes to his sequestration.
    http://www.youtube.com/watch?feature=player_embedded&v=Crt5J3XM_zk
    Just trying to keep you from looking foolish.

  12. Menzie Chinn

    Ricardo: So, when the Republican House members voted overwhelmingly for the sequester legislation, President Obama did it? Should we add “mind control” to President Obama’s alleged crimes, in your book? Inquiring minds would like to know.

  13. Robert Weiler

    Does anybody really care whose fault it is that we got stuck with a stupid policy? The fact is that Obama now recognizes it as a stupid policy even if it was his stupid policy, and the GOP continues to endorse ‘expansionary austerity’ despite the now overwhelming evidence that it doesn’t work. If the GOP wanted to propose some alternative that actually made economic sense, there is nothing stopping them. Except, of course, an ideological commitment to zombie ideas and a desire to punish the old, the sick, and the poor for being old, sick, and poor.

  14. Ricardo

    Menzie,
    Do you really believe that Obama’s sequestration is a crime?
    Just an aside, do you realize that we sent more money to the victims of Hurricane Sandy than we will cut from the budget when sequestration takes affect?

  15. 2slugbaits

    Ricardo As is well known, the Bob Woodward story wasn’t quite right. What actually happened was the Tea Party wing of the GOP (in particular, it was former Congressman Allen West (R-FL)) that demanded an across-the-board meat axe approach to the sequester. The Tea Party types were concerned that Obama would only apply the sequester to GOP districts, so they insisted on a meat axe approach that did not give Obama any latitude. Jack Lew was in those negotiations and played the old B’rer Rabbit role asking them if they were really, really, really sure that’s what they wanted. Lew recognized the problems that this would create for the GOP if and when the sequester happened. What Lew reported to Harry Reid was the “solution” that the Tea Party insisted upon. Now Jack Lew is a crafty guy and knows the budget inside and out, so he helped write the legislation in a way that exactly fit with the Tea Party’s demands.

  16. Jeremy

    KHarris “Does it matter whose at fault? I don’t recall raising that issue.”
    You don’t recall writing this “the way you managed to imply that this problem is all Obama’s fault.”?
    My point was nothing to do with apportioning blame, I think it is pretty clear that I have no time for the block-headed GOP.
    My point was that the President, if he does not want to go down in history as behaving like an irresponsible teenager, needs to lead us out of this ridiculous situation even if it means compromises.
    Leadership is all about finding middle ground and going forward. Leaders are not concerned with who is at fault or who is to blame. Look at Nelson Mandela if you want to understand Leadership. Look at Obama if you want to learn precisely what NOT to do. I have never seen such a divided situation…where is Bill Clinton when you need him?

  17. Dave L

    Jeremy:
    You’re making sense, except for one thing – there is no compromise on offer from the GOP. They insist on replacing the sequester entirely with cuts to non-defense spending, period. So in practice what you’re advocating is a comprehensive surrender, not a compromise.
    The other obvious point to make is that in all previous episodes of this fiscal theater, we’ve had no public movement from either side until the last moment, at which point some sort of deal gets patched together. Why not assume that the same tired plot – hackneyed though it may be by now – is being staged one more time?

  18. Jeremy

    Dave,
    So what you are saying is that there is nothing the President could do. With all avenues exhausted, he might as well play golf and let fate decide if the GOP turns chicken or the economy gets sideswiped?
    Sounds like a plot from a satirical movie rather than the truth!

  19. Menzie Chinn

    Jeremy: If getting “something” done entails doing something that imposes even greater damage on the economy (e.g., concentrate all spending on discretionary nondefense) — which as far as I can tell is what any given alternative proposed by leadership Republicans — then in what kind of world is that an optimal thing to do? Perhaps you can elucidate the specific proposal you think would be better, and then what macroeconomic model justifies this recommendation.

  20. Jeremy

    Dave,
    Ok you have convinced me. There really is no other option but to play Golf. At least he can play with a clear conscience.

  21. Ricardo

    Slug,
    I am more inclined to believe Woodward who wrote his comments before sequestration than the spin of administration lackies trying to save face after the fact. I stopped being gullible a long time ago.

  22. Ron

    I’m surprised that so few of the comments actually discuss economic matters. Instead, we get person S making a fairly unremarkable observation, followed by person J posting “Oh, so you’re saying [something else entirely that S did not actually say at all].”
    (Ok, maybe I’m not really surprised.)

  23. Jeremy

    Ron,
    If you are interested in economic matters I’d recommend this
    http://www.tullettprebon.com/Documents/strategyinsights/TPSI_009_Perfect_Storm_009.pdf
    It is a compelling read. I still think that USA could save itself by raising taxes, adopting protectionist measures and cutting out of control non-value add government expenditure.
    However, if the present gong show between GOP and Democrats…well as they say “Nero fiddled while Rome burned”….(although strictly speaking he probably played something like a lute as a fiddle did not exist back then….
    so long and thanks for the fish!

  24. Ricardo

    Slug,
    For your edification here is a link to Bob Woodward’s op ed in the Washington Post on this issue.
    Excerpt:
    The White House chief of staff at the time, Jack Lew, who had been budget director during the negotiations that set up the sequester in 2011, backed up the president two days later.
    “There was an insistence on the part of Republicans in Congress for there to be some automatic trigger,” Lew said while campaigning in Florida. It “was very much rooted in the Republican congressional insistence that there be an automatic measure.”
    The president and Lew had this wrong. My extensive reporting for my book “The Price of Politics” shows that the automatic spending cuts were initiated by the White House and were the brainchild of Lew and White House congressional relations chief Rob Nabors — probably the foremost experts on budget issues in the senior ranks of the federal government.
    Obama personally approved of the plan for Lew and Nabors to propose the sequester to Senate Majority Leader Harry Reid (D-Nev.). They did so at 2:30 p.m. July 27, 2011, according to interviews with two senior White House aides who were directly involved.

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