6 degrees of sequestration

Sequester: Apocalypse or not?

David Weinberg Mar 1, 2013

On the occasion of the first day of the sequester — the across the board cuts to the federal budget that kick in today — we thought it’d be useful to ask the question: What might the economy look like March 1, 2014, if Congress didn’t do anything to change them.

Let’s do a little time travel.

Imagine it’s March 1, 2014 and you’re at the airport. Cuts to the Homeland Security Budget would likely result in fewer TSA workers, meaning it will likely take longer to get through security lines. Meanwhile more than a hundred air traffic control towers at airports across the country are set to operate under limited hours, or close entirely. The combination could result “longer lines at the airport, flight delays — that makes workers less productive, it makes businesses less willing to have their employees travel, so that could be a drag on growth,” says economist Gus Faucher, at PNC financial.

Bottlenecks at shipping ports could be another ripple effect. Customs and Border Patrol are preparing to furlough approximately 10 percent of its daily work force, meaning there could be fewer people to do things like inspecting imported cargo containers for radioactive material — a practice put in place after the 911 terrorist attacks.

“If the shipping lines start seeing a huge bottleneck here, they’re going to start planning around it and planning to move more cargo to other ports” in Canada and Mexico,” says Daniel Yi, spokesman for the Port of Long Beach, which supports 300,000 jobs and $155 billion worth of trade.

But before we get too doom and gloom, some economists see potential upsides to the sequester. A reduction in federal debt could rev up confidence on Wall Street. If the government is spending less, and borrowing less, that might free up tight credit, prompting businesses and banks that are currently investing in treasury bonds to look elsewhere. Private capital would have to “go out and lend to other institutions—businesses and households,” says Faucher.

A happy chain reaction could ensue, that stimulates the economy. “Businesses go out and invest in equipment and software and buildings to make their firms more productive and increase profits, so that would be a positive to the economy,” he says. “And households would be borrowing to purchase a new home, or cars or appliances.”

Mark Zandi, economist at Moody’s Analytics, predicts the housing market, which is slowly recovering right now, will “help provide enough juice to keep us out of recession despite the fiscal headwinds.”

And in a sequester best-case-scenario, the housing market could even get a boost, says housing economist Nic Retsinas, at the Harvard Business School. “If the result is a signal to the market and investors that we are on a road to a more balanced budget, that we are on the road to a more efficient and more effective government, then that could lead to more private capital coming in to the housing market,” he says.

But Retsinas cautions, those gains could be dampened by sequester cuts that would create a backlog in mortgages backed by the Federal Housing Administration. In the last few years, he says, FHA loans have made up almost 35 percent of home sales.

Retsinas, housing for low-income families would likely by hurt by the sequester. So, by March 1, 2014, “if you were very poor, and you were a beneficiary of federal housing programs, you might have lost your subsidy,” he says. “If you were in a shelter, you might find that the doors were closed.”

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