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Economists: Political uncertainty more dangerous than budget cuts

By   /   February 25, 2013  /   News  /   2 Comments

Part 1 of 11 in the series The Sequester

By M.D. Kittle | Wisconsin Reporter

MADISON — Leave it to Drs. Congress and Obama to prescribe political rat poison to an ailing U.S economy — an economy made sicker by political uncertainty, economists say.

With the clock ticking on automatic budget cuts, President Obama and fellow Democrats have painted the bleakest sky-is-falling picture. On Monday, looking to rally support for his plan to stave off another politically imposed fiscal calamity, Obama blanketed national and state media with dire warnings of the impacts of federal sequestration.

Wisconsin would face tens of millions of dollars in lost federal money, hitting everything from education for children with disabilities to clean air and water to military preparedness.  The administration asserts about 3,000 civilian Department of Defense employees in Wisconsin would face furlough days, saving the federal government about $12.4 million.

Repeated fiscal cliffs are doing a lot of damage to the nation's struggling economy, economists say

MISTAKES: Repeated fiscal cliffs are doing a lot of damage to the nation’s struggling economy, economists say

Obama blames congressional Republicans. They blame him.

“The president is willing to compromise, but on behalf (of) the middle class he cannot accept a deal that undercuts their economic security,” the administration said in its full-court sequestration press Monday. “Our economy is continuing to strengthen but we cannot afford a self-inflicted wound from Washington.”

But Obama did accept the sequestration deal in 2011, in exchange for extending the nation’s debt ceiling. It was all part of a deficit-reduction plan with a ticking fiscal time bomb, and the president pushed it, according to Washington Post icon Bob Woodward, who blames Obama for the crisis in his book, “The Price of Politics.”

“In fact, the final deal reached between Vice President (Joe) Biden and Senate Minority Leader Mitch McConnell (R-Ky.) in 2011 included an agreement that there would be no tax increases in the sequester in exchange for what the president was insisting on: an agreement that the nation’s debt ceiling would be increased for 18 months, so Obama would not have to go through another such negotiation in 2012, when he was running for (re-election),” Woodward wrote in a recent Post column.

And now, less than two months removed from the first doom-ridden fiscal cliff and a deal that averted predicted economic disaster but did little to deal with debt relief, the political game of chicken is again wreaking havoc on an economy yet to recover from a deep, painful recession, economic experts say.

While the president and members of Congress scream economic Armageddon over the looming across-the-board budget cuts, congressional inactivity arguably has had a more disastrous effect on the economy, according to a new forecast.

A survey released Monday by the National Association for Business Economics found that nearly all of the economists surveyed believe that growth in real GDP is likely to be negatively affected by fiscal uncertainty in Congress — from sequestration to work yet to be done on the continuing resolution and the debt ceiling. All of those manufactured deadlines come due in the coming weeks.

“Businesses held off on investing in equipment purchases and hiring last fall because of the fiscal cliff. Now the same thing may be happening with sequestration,” said Ken Simonson, NABE president and chief economist at the Associated General Contractors of America.  “I do think the fiscal cliff had negative effects on growth in the fourth quarter (of 2012) and the personal consumption side, in the first quarter of this year.”

The uncertainty over the previous fiscal cliff delayed IRS movement on tax returns, stalling the opening of refund season and pushing back consumer spending in the first quarter, Simonson said.

Forty-nine professional economic forecasters were surveyed between Jan. 28 and Feb. 5 and looked at the outlook for 2013 and 2014.

A third of economists surveyed forecast the federal fiscal uncertainty will shave as much as a percentage point off real GDP this year, and 13 percent said it could be reduced by more than 1 percent. U.S. gross domestic product, or annual output, is about $16 trillion.

“If you’re knocking a percentage point off of that, you’re losing about $160 billion of output this year,” Simonson said. “Presumably that has a lot of jobs attached to it.”

Michael Tanner, senior fellow with the Cato Institute, a Washington, D.C.-based free-market think tank, said both Congress and the Obama administration have abdicated their responsibility, laying the unnecessary weight of political uncertainty on the backs of business.

“If they ran a business that way, they would get fired,” Tanner said.

State Sen. Alberta Darling, R-River Hills, is co-chair of the Legislature’s Joint Finance Committee. She said the political games being played in Washington make complicated work of state budgeting.

Darling said fiscal cliffs and automatic budget cuts are to be expected in a federal government that hasn’t passed a U.S. Senate budget resolution in nearly four years.

“It’s just irresponsible,” Darling said. “The uncertainty created by that lack of fiscal responsibility is overwhelming.”

The senator said the proposed cuts to Wisconsin’s military families will be particularly devastating. Darling seems to be on board with many automatic cuts, but not all — not the ones that hit home.

Cato’s Tanner, however, is among a throng of conservative voices calling for Congress to let the ax fall, if only to send a message to U.S. creditors.

“I think it’s gotten to a point that if they don’t show some willingness to reduce the debt or deficit, we’re in serious trouble,” he said “The debt overhang is creating as much uncertainty as anything else.”

The $85 billion in automatic cuts, about half of which actually would come this year, represent less than 2 percent of the $3.6 trillion federal budget.  If the sequestration occurs, Tanner said there is some flexibility built in.

“They could do the whole savings on March 2 and inflect a lot of pain on the public, but they really can spread out a lot of the reductions,” the Cato official said.

The sequestration mess prompted Darling to quip that Washington’s budget troubles further validate Gov. Scott Walker’s rejection of a federal Medicaid deal. If Congress and the president can’t come to terms on $85 billion, how are they going to come through with hundreds of billions of dollars in funding to expand Medicaid in the states, she asked.

Wisconsin would receive about $4.4 billion in federal funding during the next few years, but eventually would be required to pick up about 10 percent of the increased annual Medicaid cost.

“What assurance are we going to have that we will get any of that money?” Darling asked. “We’d be stuck with the whole bill.”

While Simonson said Congress ‘debt dance has been destabilizing for U.S. business, he shares the belief held by many of his fellow economists that tens of billions of dollars in automatic budget cuts would be disastrous for a struggling U.S. economy.

The Associated General Contractors of America projects sequestration could halt $4 billion in federal construction work.

“Those things cause needless friction and anxiety in the economy,” he said, asserting the hit to spending will do more harm than good.

“That doesn’t seem to me to be a very sensible way to achieve savings,” Simonson said.

Contact M.D. Kittle at [email protected]

Part of 11 in the series The Sequester


M.D. Kittle is bureau chief of Wisconsin Watchdog and First Amendment Reporter for Watchdog.org. Kittle is a 25-year veteran of print, broadcast and online media. He is the recipient of several awards for journalism excellence from The Associated Press, Inland Press, the Wisconsin Broadcasters Association, and others. He is also a member of Investigative Reporters & Editors. Kittle's extensive series on Wisconsin's unconstitutional John Doe investigations was the basis of a 2014 documentary on Glenn Beck's TheBlaze. His work has been featured in Town Hall, Fox News, NewsMax, and other national publications, and his reporting has been cited by news outlets nationwide. Kittle is a fill-in talk show host on the Jay Weber Show and the Vicki McKenna Show in Milwaukee and Madison.

  • Gary

    Why doesn’t Wisconsin just not send money to Washington ?

  • Seriously, you are going to cover this after failing to recognize the same problem when Republicans did it for the last two years?