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How Sequestration Budget Cuts Could Affect California

| February 22, 2013
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Update: Barack Obama warns of kids going without vaccination and other severe effects of sequestration.

There’s no question California will suffer if Congress can’t reach a budget deal. The “sequester” cuts scheduled to start March 1 would hit schools, health care, parks, transportation — just about anything connected to government.

Flicker/Kenteegarden

Flicker/Kenteegarden

On Friday, U.S. Transportation Secretary Ray LaHood warned that “flights to major cities like New York, Chicago and San Francisco could experience delays of up to 90 minutes during peak hours becasue we will have fewer controllers on staff.”

But predictions of a devastating blow to the state’s economy may be a little exaggerated. “The effect would be a small reduction in spending, which would mean a small effect on jobs,” says Stephen Levy, director and senior Economist of the Center for Continuing Study of the California Economy in Palo Alto.

Out of $85 billion in cuts to federal programs planned for the next fiscal year, $9 to $10 billion would come out of programs in California, says Levy. “That’s a very small percentage of the total California economy, which is about $2,000 billion.”

That doesn’t mean we can all relax.

The sequester threat dates back to August 2011 when Democrats and Republicans were battling over the amount the federal government could legally borrow to pay its bills.

Republicans didn’t want to raise the debt ceiling unless Democrats agreed to budget cuts. Democrats didn’t want to cut.

As a compromise, Congress came up with a package of cuts that would go into effect if a bipartisan committee couldn’t come up with a better deal: $850 billion would be subtracted from the budgets of dozens of federal agencies over 10 years, and half of it would come out of the military.

“The idea is that Republicans would hate defense cuts and Democrats would hate non-defense cuts,” says Alan J. Auerbach, a University of California Berkeley professor of economics and law. “So the committee would come up with an agreement. But the committee didn’t come up with an agreement.”

The cuts were originally scheduled for Jan. 1, but the two sides agreed to push the deadline back to March 1 in hopes of working something out. They still haven’t reached a deal.

Democrats are still holding out for tax increases to make the cuts less severe, and Republicans are determined not to raise taxes, the New York Times reports.

Auerbach is still betting that the two sides will reach a deal to avoid the cuts. “They were designed to be unpleasant and force and agreement, and I think they will do that,” he says.

What if they don’t?

It’s not a pretty picture. The economy is still sluggish, and less federal spending means it will take even longer to pick up speed, says Auerbach.

To be sure, some cuts may be necessary, he says. The government has been spending more than it takes in, and that’s not good for the economy in the long term. But the biggest increase has been in entitlement programs like Social Security and Medicare, and these are exempted from the sequestration cuts.

“If I could design policy, I would put in place a variety of structural reforms to entitlement programs and phase them in over time,” Auerbach says.  By “structural reforms” he means careful cuts, like for example raising the age when people become eligible for benefits, as opposed to suddenly trimming a percentage from everyone’s Social Security check. He’d also increase taxes over time.

But he wouldn’t do any of that right away, because he thinks the economy is too weak right now.

Levy agrees with estimates he’s seen that the cuts could trim about half a percentage point from the national gross national product, and thinks California would suffer that proportionally.

In most respects, California would have a similar experience to the rest of the country.

The most immediate jolt would come if LaHood follows through on his threat to furlough air traffic controllers and shut down 100 air traffic control towers.

National parks could shorten hours. Doctors could lose 2 percent of their Medicare payments. Millions of dollars could evaporate from school districts.

Levy thinks the most serious effect would be the long-term consequence of reductions in research money from the National Institutes of Health, the National Science Foundation, universities and other institutions and other programs that lead to future inventions — “the kind of things that support the venture capital economy in California.”

It could be our grandchildren who suffer the most.

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Category: Economy

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  • Dee dee

    Direct result of our so called leaders!

    • deeeman

      Amen, brother!

      • deeeman

        Or sister, I ain’t peeking in your window or nothing.