The immediate impact of the 2013 sequester was oversold. President Obama, in a typical statement, warned in February that if the $85 billion in security and nonsecurity cuts were enacted as scheduled on March 1, "all our economic progress could be put at risk."
That's not how it happened. Gross domestic product growth rose to 2.5 percent in the second quarter, up from 1.8 percent in the first. The increase in the GDP would likely have been higher without the fiscal drag, but the sequester didn't force the U.S. to relive the economic travails of 2008, as one tuning into the doomsday rhetoric might have expected.
"Throughout January and February, the administration had one 'the-sky-is-falling' story after another," says Barry Anderson, a former deputy director of the Congressional Budget Office and senior official at the Office of Management and Budget. "Here we are in the middle of October … the world hasn't stopped spinning."
January will bring new spending limits, part of the 2011 Budget Control Act that created last spring's sequester, and another round of dire messaging from Democrats who want to reverse them. But even in 2014, the effects aren't expected to cause a macroeconomic catastrophe, and supporters of the blunt cuts and lower spending caps are likely to point to the plodding GDP growth as evidence of their success as a deficit-reduction tool. The problem is, that's not necessarily the best place to look.
The tax increases Congress passed as part of the New Year's Day fiscal-cliff deal had a bigger impact on the economy in 2013 than the sequester, says Paul Ashworth, chief U.S. economist at Capital Economics, a macroeconomics research company. GDP growth depends not on the absolute level of decline in spending—which will be larger in 2014—but on whether that decline is bigger or smaller than it was the previous year. Although next year's cuts will be roughly $20 billion more than this year's, that's just 0.125 percent of the $16 trillion economy. "That isn't an awful lot on the level of GDP," Ashworth says.
The missing growth won't be apparent in the headline numbers. In July, CBO estimated that repealing the sequester would add 900,000 jobs by this time next year, a sizable number in a country where 11.3 million people are unemployed. CBO also projected that GDP would be 0.7 percent higher if the cuts were eliminated.
"This pain that we're meting out … may not show up in higher unemployment or lower GDP growth. These are quite granular impacts," says Jared Bernstein, a former economic adviser to President Obama and Vice President Joe Biden. For the past six months, Bernstein has been tracking the programs and people feeling the sequester's pinch. They include Head Start, public defenders, rural residents who received rental assistance from the Agriculture Department, and weather forecasting.
Opponents of the sequester say the problem is less about the reduction in spending than the way the cuts are taking place. "It isn't primarily the size of either the federal budget or the defense budget that poses problems; it is the dramatic change in the composition of those budgets over the decade—entitlements are pushing out investments. And [the] sequester worsens that trend," staff at the Bipartisan Policy Center wrote in a recent, bluntly titled report, "From Merely Stupid to Dangerous: The Sequester's Effects on National and Economic Security." "More pain is coming," they wrote, "and it will be more intense."
The architecture of next year's cuts—$109.3 billion scheduled for fiscal 2014—will be different. The Budget Control Act (a response to the 2011 eleventh-hour debt-ceiling fight) requires the federal government to lop $1.2 trillion off projected deficits over 10 years. Where last year's cuts were done with a "meat cleaver," across-the-board approach, this time appropriators can choose what to cut, so long as they stay below the defense and nondefense discretionary spending caps imposed by the law.
That may sound preferable, but it probably won't matter much from an economic perspective. Asked at a hearing last February whether rearranging the same level of cuts could help mitigate the economic pain, Federal Reserve Board Chairman Ben Bernanke told lawmakers, "The near-term effect on growth would probably not be substantially different if you did it that way."
Anderson, the former OMB official, says 2014 is "a more serious situation" than 2013, but not because the cuts are bigger. It's a question of "attitude and confidence." Neither the fiscal fights taking place in Congress nor the broad strokes of the sequester inspire much confidence among those seeking a more permanent solution to the country's frightening long-term fiscal-sustainability problems. At the same February hearing, Bernanke warned lawmakers that the sequester might even lead to less deficit reduction in the short run if it slowed the recovery. "To address both the near- and longer-term issues, the Congress and the administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run," he recommended.
Republicans didn't signal any willingness to lift the spending caps during the latest fiscal negotiations. Rich Lowry, the conservative National Review's editor, said Tuesday night on Fox News as the House GOP debt-ceiling plan crumbled, "As long as Republicans don't lose the sequester in this process, it is not a complete debacle."
The deal Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., reached set up a House-Senate budget-negotiation process that's been absent so far this year. New urgency to alter the sequester is unlikely, though; the economic data that come in between now and January are unlikely to be very different from what we've seen so far. So any pressure to revisit sequestration will probably come from elsewhere—namely, its impact on individual government programs, not on the overall economy.