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Moving the Hurdles

February 1, 2013

The Sequester is still set to take effect on March 1, but lawmakers still donít appear to be preparing for large cuts to federal spending.
-Scott Brown, chief economist, Raymond James

The ink of my weekly piece was not even dry last Friday, when the House announced that it would vote on a three-month delay in the debt ceiling showdown. Congress now has until May 19 to raise the debt ceiling. So, the most dangerous hurdle has been moved down the track. Other hurdles remain in place.

The Sequester is still set to take effect on March 1, but lawmakers still donít appear to be preparing for large cuts to federal spending. Note that itís not as simple as kicking the can down the road. The $24 billion two-month delay in the Sequester had to be ďpaid forĒ through spending cuts in other areas and through higher taxes. Another delay would have to be done through similar measures. Hence, fiscal tightening is likely to happen one way or another unless Congress figures out how to bypass the law entirely (itís be done before).

The amount of budget tightening this year is expected to total about $110 billion dollars, or about 0.7% of nominal GDP and about half of that will be in defense spending. For some reason, many anti-Keynesians in Washington suddenly get religion when you start talking about defense spending. Most economists believe that the multiplier on defense spending is two or more. That is, a $1 dollar cut in defense spending reduces overall GDP by $2. Thus, the economic impact would be more severe than it appears at first glance. This isnít farfetched. In many parts of the country, weíve seen that a closing or scaling back of a military base can have a devastating impact on the local economy.

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