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Economists: Sequester's effect expected to be modest in midstate, elsewhere

By - Last modified: March 1, 2013 at 11:54 AM

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The federal sequester that begins today will have very little effect on the state or regional economy, economists and political analysts said this morning.

“Most people probably won’t notice the difference,” said Nathan Benefield, director of policy research at the Harrisburg-based free market think tank the Commonwealth Foundation.

The list of budget cuts affecting Pennsylvania that the White House released Sunday totals $65 million dollars, said Kurt Rankin, regional economist with Pittsburgh-based PNC Financial Services Group Inc. That amounts to 0.014 percent of the state’s economy, he said.

Even if the cuts in Pennsylvania reach the high-end estimates of around $200 million, that’s only 0.04 percent, he said.

“It’s not going to be what sinks the economy,” he said.

Nor will the midstate see a greater impact than other areas, he said. Though the region has several highly visible federal government operations, such as military installations, it has fewer total federal workers per capita than Pittsburgh or Philadelphia, he said.

In general, the sequester is likely to slow economic growth slightly, but probably not enough to push the economy into recession, said Mark Price, a labor economist with the Keystone Research Center, a left-leaning public policy think tank.

Nevertheless, politically, “the focus should be on unemployment and the pace of growth,” rather than deficit reduction, he said. “There is no evidence” that immediate cuts in the deficit will help the economy, he said.

The sequester is a consequence of Congress’ and President Obama’s inability to reach agreement last year to reduce the federal deficit. Obama and Congressional Democrats have called for a mix of spending cuts and revenue increases, while Republicans have insisted on achieving reductions through cuts alone.

Under current law, federal debt held by the public will decline over the next couple of years, but then it will begin to rise again due to debt service and the costs of social insurance programs for an aging population, according to the Congressional Budget Office.

By 2023, debt will reach 77 percent of GDP, the CBO said.

“Such high and rising debt would have serious negative consequences,” the CBO said.

Voters are likely to blame both parties for the impasse, though polls show Republicans are taking a little more heat, said Terry Madonna, political analyst and professor at Franklin & Marshall College.

Most Congressional districts have been gerrymandered to the point that they are safe Republican or Democratic seats, he said.

The main risks for incumbents are primary challengers, who are eager to portray any compromises as betrayal of party principles, he said. Given that dynamic, incumbents see relatively less political downside in intransigence, he said.

Moreover, the sequester’s provisions take effect gradually, so much so that many voters may likely not notice its effect at all, he said.

Businesses’ attitude toward sequestration will likely depend on how it affects their specific sector, Madonna and Price said.

Companies that depend heavily on retail spending may be hurt if the sequester depresses it, Price said. Conversely, companies that could see a tax impact such as loophole closure from a deficit-reduction plan may see the sequester as a preferable alternative, he said.

In general, “I think you’re going to hear mixed reactions,” Madonna said.

In the business community’s view, “government spending has to be cut,” he said, “even though this is kind of a mindless way to do it.”

 

Write to the Editorial Department at editorial@cpbj.com

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