Sequestration will cost 2.14 million jobs, study says

Severe, across-the-board budget cuts slated to kick in January 2013 would cause a sharp uptick in both federal and private sector unemployment, according to an academic report commissioned by the Aerospace Industries Association and released Tuesday.

According to the study of the economic impact of the 2011 Budget Control Act on the Defense Department and other federal agencies, the budget-cutting tool known as sequestration would reduce the nation’s gross domestic product by $215 billion, decrease personal earnings of the workforce by $109.4 billion and cost the economy 2.14 million jobs—with the most severe impact coming in 2013 in what is shaping up to be a continually weak economy. Sequestration will trigger automatic cuts on Jan. 2, unless Congress can agree on an alternative savings plan.

The projections, compiled by George Mason University economist Stephen Fuller, were unveiled at a Capitol Hill news conference attended by two senators and two big-city mayors, with the lawmakers’ expressing opposing views on the key question of whether new tax revenues are needed in crafting a long-term and bipartisan deficit reduction plan.

Spending cuts of $56.7 billion for defense “would result in the loss of 325,693 direct jobs, including 48,147 civilian DoD employees,” the report said. A loss of $59 billion for non-Defense agencies could cost 420,529 jobs with an estimated 229,116 jobs or 54.5 percent of these direct job losses consisting of federal workers.

“Non-DoD cutbacks would have a much greater direct impact on federal employment than DoD budget reductions,” it said, because the bulk of the Pentagon’s budget goes to procurement while the lion’s share of spending at other agencies goes toward payroll.

“As a consequence of sequestration, GDP growth in 2013 will be reduced by two-thirds and unemployment will increase by as much as 1.5 percentage points, raising the current national rate above 9 percent,” the report warned.

The hardest hit would be California, Virginia and Texas, with most states taking five-digit job losses.

These job loss projections show a “dependence of state economies on federal spending,” Fuller said. “It certainly undercuts the strength of the economy and translates into a whole lot of losses for businesses that drive the economy.”

Sen. Kelly Ayotte, R-N.H., ranking member of the Armed Services Readiness Subcommittee, said she hoped the prospects of such job losses would be a “clarifying event” and an “eye-opener,” especially if legally required layoff notices are sent out this fall to contractor employees just before the national elections. “But we can come up with alternative ways to reduce spending, and it can be bipartisan,” she said.

Though Republicans already have agreed to “some revenues, raising taxes on the high-income taxpayers would harm the economy,” Ayotte added. “It’s important that we not play chicken with national security or our economy.”

Her state counterpart, Sen. Jeanne Shaheen, D-N.H., took a different tack. “No one thinks sequestration is the way we should reduce the deficit, but it should press us to take action,” she said, praising the study for focusing not only on defense but also on the entire economy. “Backing off from tough choices is not the way.”

Instead of pitting defense against domestic spending, Shaheen argued for keeping reforms to mandatory spending, as well as new tax revenues on the table. “The answer is a long-term solution—otherwise, we will be back in a year and again after that,” she said. “It’s not that we don’t know what to do, it’s that we need the political will.”

Shaheen described the rejected Simpson-Bowles deficit reduction plan as a “roadmap in front of us,” and she cited comments by former New Hampshire Republican Sen. Judd Gregg suggesting that revenues could be tapped by reforming tax expenditures.

The impact of the projected budget cuts on states and localities was stressed at the press conference by Phoenix Mayor Greg Stanton and San Diego Mayor Jerry Sanders.

Stanton said sequestration “would likely put Arizona in a recession,” and implored Congress “not to wait for a lame duck session, which is not relevant to the American people.”

Sanders, noting that San Diego boasts the country’s largest military population with one of four jobs defense-related, said rather than pursuing “arbitrary, politically motivated cuts to national defense,” Congress should “target spending cuts where they have the least impact on the public.”

Marion C. Blakey, president and chief executive officer of the Aerospace Industries Association, which has coordinated a campaign against sequestration called Second to None, said, “unless our leaders in Washington take action, massive cuts have the potential to impact everyone from the defense worker to teachers, health care professionals, government employees and beyond.”