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Economists' rare consensus: sequester is a really bad idea

WASHINGTON - Sure, we need to cut the federal budget deficit. But this is no way to go about it

That’s the view of nearly 200 economists surveyed by the National Association for Business Economics, who are meeting here for the group’s annual policy meeting.

The sequester package – which mandates "across the board" spending cuts on a relatively small portion of total federal spending – was supposed to be so painful it would force Congress to come up with a more rational plan. When enacted in Aug. 2011, the deal pulled the country back from the brink of self-imposed default.

It may have made for a good political solution at the time. But there's widespread agreement among the economists here, who are paid to help American companies, investors and consumers navigate the hazardous waters of a still wobbly economy, that the deal was very bad economics.

Some 94 percent support the idea of cutting the federal deficit – which Congress has already done with a series of tax increases and spending cuts that kicked in well before the sequester meat clever fell on Friday.

But a strong majority (more than 70 percent) also agree that the sequester is a bad idea. And they widely agree that the 18-month spectacle of the “fiscal cliff” budget dickering has held back the economic recovery.

Economists don’t ordinarily reach that kind of consensus about anything. (Which brings to mind the old joke: you could line up all the economists in the world end to end and they still would reach a consensus.) But it’s not hard to see why a group of professional economists don’t like what Congress has done..

To be sure, the $85 billion spending cuts that officially took effect Friday seem like a drop in the bucket of a $3.7 trillion budget. (Or a $15.8 trillion economy, for that matter.) That why Republicans like Senate Minority leader Mitch McConnell said on CNN Sunday, in effect, that all the hand-wringing about dire consequences are just fear-mongering by the White House.

"This modest reduction of 2.4 percent in spending over the next six months is a little more than the average American experienced just two months ago, when their own pay went down when the payroll tax holiday expired," McConnell said.

Or as Washington Post columnist George Will summed up the cuts: “Washington chain-saw massacre - we must scrape by on 97.7 percent of current spending!"

The problem with that kind of economic analysis is that it assumes these cuts are going to be evenly distributed over a year’s worth of spending and across the entire budget. But that’s not how the sequester works.

Because the cuts didn’t kick in until March 1, and because the federal government operates on a fiscal year that ends Oct.1, the impact of a year’s worth of will be compressed into next seven months. On an annual basis, that works out to more like an overall 4 percent cut.

Still, that’s not such a big deal. Except that almost all of Medicare and Social Security – spending that accounts for that roughly 60 cents of the federal budget – is off limits. That further concentrates the impact on just two-fifths of the rest of the budget, known as "discretionary" federal spending.

But because Congress took some discretionary budget lines off the table, the cuts are even further concentrated on the remaining agencies and programs that weren’t able to dodge the knife. And those agencies and departments aren’t allowed to make rational decisions about which types of spending to trim and what to save. (Remember: at the time it was enacted, this idea was designed to be so insane it would force a more rational political compromise.)

So while the overall impact on gross domestic product will be relatively muted, that economic forecast will come as small consolation to travelers who may be grounded by cuts to FAA air traffic controllers. Or shoppers paying higher meat prices because meat processors had to close after federal inspectors were furloughed.

The average impact on total spending could be relatively benign in relation to the entire U.S. economy, but the pain could be much more severe for those who rely on the government services where the cuts fall the hardest. (As the economist said: After putting one hand on the stove and the other in a bucket of ice, “on average, it doesn't feels so bad.”)

While they agree the sequester is the wrong way to go, opinions among economists here are more characteristically divided over exactly how to bring the federal budget back in better balance. More than half want to get the job done “only” or “mostly” via spending cuts; about a third want to see an “equal” mix of spending cuts and tax increases, and about 12 percent favor “mostly” tax increases.

But they agree widely that the sequester missed the two most important deficit targets by a mile: reforming Medicare and Medicaid and overhauling the tax code. (Most think any tax reform should raise taxes, though they're divided on how much.)

Most economists also agree that the economy will continue to muddle along, gradually picking up speed this year and next, no thanks to Washington. The average forecast puts GDP growth at 2.4 percent for all of 2013 and 3 percent for 2014, with the unemployment rate averaging 7.7 percent this year and 7.2 next year, according to a separate survey release past month.

But a lot depends on whether Congress can come up with a more rational plan to balance the federal budget. No one, not even House Majority Leader John Boehner, seems willing to make a prediction on that question.

"I don't know whether it's going to hurt the economy or not," Boehner told NBC’s Meet the Press Sunday. "I don't think anyone quite understands how the sequester is really going to work."