Sequestration 2013 Will Significantly Hurt Millennials, Red States

We have passed the March 1 deadline for averting the sequester (the automatic federal budget cuts enacted in the Budget Control Act of 2011) and nobody – neither the White House, nor Congress – has blinked. So starting now through the end of the fiscal year in September, a total of $85 billion will be cut from discretionary programs in the federal budget.

The problem is nobody wanted this. The sequester was intended to be so brutal that both sides would be forced to work out a real compromise rather than let the cuts take place. It was like old King Solomon's threat to split a baby in half if two women claiming to be the mother couldn't agree as to whom the child really belonged. So we get no agreement on deficit reduction — whether through reduced spending or more revenues or a combination of both — and instead see budget cuts that both sides agree will be significantly harmful to the economy. Worse, we get no closer to any reconciliation of the two sides' vastly differing opinions on what the role of government is even supposed to be.

The Congressional Budget Office estimates those funding cuts will reduce the nation’s economic growth for 2013 by 0.6 percentage points and reduce the number of full-time jobs created during the year by 750,000. The CBO says the sequester’s effect is actually smaller than it might be because only some $42 billion of the money would have actually been spent this year. The rest would have been earmarked for contracts or items like new military weapons systems this year but wouldn’t actually be paid out until future years.

The effect on some programs is magnified because entitlements such as Social Security and Medicare and other mandatory spending are exempt from the cuts, meaning they will all have to come out of the one-third of federal spending that is discretionary. So, yes, meat inspection, civilian defense employee rolls, air traffic control, public health, education and such are almost certain to face furloughs, slowdowns and even layoffs.

Because older generations like the Boomers (who are now entering retirement) are more likely to benefit from entitlements like Social Security and Medicare, the effect of the sequester may fall more heavily on millennials. Those still in college may see impacts on student loans and grants. The lowered job growth and the fact that entry level jobs are likely to be a bit harder to come by will disproportionately affect millennials as well.

The White House has produced a state-by-state estimate of how much spending will be cut and how many jobs will be lost. In my blue state of California, the White House projects loses of  $87.6 million in funding for primary and secondary education, putting around 1,210 teacher and aide jobs at risk. Add 64,000 California civilian defense workers furloughed costing the state $400 million in gross pay. Red state Texas stands to lose $67.8 million in education funding and $275 million in pay lost from furloughed civilian defense workers.

As to the sequester’s effect on jobs and military readiness, it is not just the CBO and the White House that are making dire predictions. Republican House Speaker John Boehner (R-Ohio) represents the fears of a big group of Republicans when he said last week in a Wall Street Journal op-ed that the sequester, “… threatens U.S. national security, thousands of jobs and more.” Even leaders of the Republican Tea party faction have expressed mixed feelings about the sequester. Tea party standard bearer Sen. Marco Rubio of Florida, for instance, saying that the idea of the sequester is crazy (though, he adds, not as crazy as walking away from the cuts it requires). He’s clearly aware that voters may blame Republicans for the deadlock and punish them in the coming midterm elections.

Congressional Republicans offered a compromise that would have kept the size of the sequester the same, but would have allowed President Obama to decide where the cuts would come from. The president (rightly in my view) declined because accepting would have effectively made the cuts his and because if the cuts didn’t come from discretionary spending it would have had to come from entitlements like Social Security, something Democrats wouldn’t abide.

U.S. markets took the implementation of the sequester with a measure of self-control. Stocks on the Dow initially plunged more than 100 points on news that the cuts had not been averted, but quickly rose into positive territory – ending up by 35 points at the close after the manufacturing index rose more than expected.

So where from here?

The biggest issues remain untouched, principally that of what federal programs are necessary and who should pay for them? Conservatives make much of the “makers and takers” issue, effectively the claim that half the country pays taxes so that the other half can live off government benefits. Once you add in the tax loopholes the wealthy gain and the other taxes (sales, payroll and the like) the so-called takers get, the balance shifts substantially.

A Tax Foundation study in 2006 showed that the bulk of blue states were net tax donors to the federal government, paying more than they got back in federal spending. (That study is now seven years old and needs updating.) California, for instance, received 79 cents in federal spending for every dollar Californians paid in federal taxes.

Red states were more often the opposite. West Virginia received $1.83 in federal tax dollars for every $1 its citizens paid in federal taxes. Meanwhile, New Jersey at 55 cents received for every $1 paid in federal taxes and thus was by far the worst off. It makes it easier to understand why New Jersey Gov. Christie is going against the grain of other Republican state governors and accepting federal funds for expanded Medicare under the Affordable Care Act (Obamacare).

Unfortunately, the sequester brings to mind the cliché of a slow-motion train wreck.