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Someone Asked for Sequester Cliffs Notes...From Forbes...
A Sequester Cheat Sheet: Answers To All The Questions You Were Afraid To Ask
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Politicians never tire of playing as financial engineers. Such an indefatigable nature, in turn, leads to vast, complicated proposals difficult to wrap your mind around.
The sequester, the second of three monster problems the nation faces this year, begins tomorrow. Now, you don?t have time to study the nuances of the federal budget or examine what millions of fewer dollars will do to the National Zoo. Safe to say, though, we?re talking more than primate habitats. The sequester stands to have a wide, deep and damaging effect throughout the country. So, here are the questions?and answers?you?ve probably wanted about this whole unpleasant affair. Modesty, of course, forbid it.
What is the sequester?
The sequester is the $1.2 trillion in budget cuts that begin tomorrow.
Didn?t politicians solve this in January?
Alas, no. The budget cuts were indeed set to start at the beginning of January, but politicians agreed to push it back. They figured two more months of negotiations would allow them to find a decision. So much for that.
But even before January??
To get technical, this should?ve been solved back in August 2011, when Congress missed the debt limit deadline, and the country nearly plunged into a double-dip recession. Eventually pols raised the limit by $2.1 trillion, and then tasked a supercommittee to find an additional $1.2 trillion in cuts through 2021. The supercommittee failed, and so, we face automatic, across-the-board spending cuts?set to start tomorrow.
When you say ?across the board,? you mean?
They pare back many, many government functions. Half ($54.7 billion annually) comes from defense spending. Another half from non-defense programs. Medicare is particularly on the chopping block. Medicare providers will now be paid for 98 cents on the dollar, and all told, Medicare will lose $11.1 billion. This still leaves another $43.6 billion to come from other non-defense programs, a hefty bite that will pinch everything from the Capital Police to the JFK Center for the Performing Arts. NASA is shorted $970 million. Airport security? $323 million. The FBI? $480 million. And the pandas too. The Smithsonian Institute, which includes the National Zoo, loses $52 million.
Here?s something else that will provide perspective. Think back to high school U.S. history. Recall the Tennessee Valley Authority, one of the programs that put unemployed Americans back to work during the Great Depression. It still very much exists today, and stands to lose $35 million.
Worth noting: no programs will cease to exist. And it won?t mean reduced troop pay or fired federal workers. It could mean furloughs for federal employees. Which, you know, is basically a pay cut.
Uh, so what isn?t getting slashed?
Congress, in its grand wisdom, did make some organizations exempt. For example, some elements of the Forest Service, welfare, veterans benefits and housing services escaped.
What went wrong in Washington, D.C.?
President Obama won the first round of the match. Republicans caved some on tax increases during the debt ceiling talks. But the GOP stood steadfast on wanting spending cuts to follow, and Democrats have insisted they won?t pass any legislation that doesn?t include cuts and revenue increases. Ahem. Greater taxes, that is. Democrats want to raise levies, and the GOP strongly opposes any such move. Thus, the deadlock with no compromise in sight.
Isn?t cutting back a good thing, though?
For sure, America has a spending problem. The nation?s debt-to-GDP ratio is close to 70%, and the Congressional Budget Office, a reliable, non-partisan source on these matters, predicts the U.S. would soon reach perilously high levels of debt within a decade. (Much more than 90% is a red flag.) That said, it?s not a deft decision to cut so indiscriminately. It cuts both muscle and fat. Congress was suppose to find a way to trim away only fat.
Sounds bad, but I don?t collect any of these benefits. As for the Forest Service, I?m decidedly indoorsy. How can it possibly affect me?
You?re staring at the trees and missing the forest. Mark Zandi, chief U.S. economist at Moody?s Analytics, believes the sequester will reduce GDP this year by about 0.5%. Any such reduction would be felt throughout the economy. Potentially lowering business confidence, which means fewer people hired, which means less to spend, which ? you get the drift. A poor situation.
You journalists, surely you exaggerate?
OK. Is it worse than the fiscal cliff?
Negatory. Zandi estimates the fiscal cliff compromise?s tax cuts and spending increases means a 0.8% dent in GDP. Without meeting halfway, closer to 3.5%. The country would?ve certainly entered a recession.
Still, Zandi studied the issues, and believes we?ll likely see further Congressional action on the sequester to come. When, in the coming months, constituents complain about the broad cuts? effects, lawmakers may pass additional legislation that spreads the pain over several years, Zandi says.
What stocks are likely to get hit the most?
Primarily defense ones. Keep a keenly focused eye on earnings from Lockheed Martin, Boeing, Raytheon, United Technologies and Northrop Gruman. Though, any business with significant revenue from government contracts will get hit.
Can I see how this affects me on a state-by-state basis?
President Obama did indeed commission a report that studied the effects for each state, as part of a (so far unsuccessful) plan to force Republicans into a compromise. The gist of the study? Pity folks in Texas and California.
Wait. You said the sequester was only the second of three major problems the U.S. faces this year. The fiscal cliff was first. The second is the sequester. What?s the third?
The debt ceiling debate. Politicians should resume talks shortly because the U.S. will hit its borrowing limit on May 18. And, no, you probably shouldn?t expect a grand bargain much before 11 p.m. on May 17. If not after.
Re: Someone Asked for Sequester Cliffs Notes...From Forbes...
I like this explanation (sorry can't make it clicky):
http://www.huffingtonpost.com/2013/03/01/colbert-nails-the-sequester-why-its-bad-for-both-parties_n_2789379.html?ncid=edlinkusaolp00000003