WASHINGTON -- As the year winds to a close, Congress is cautiously celebrating passing a year-end budget that relieves just about a third of the sequestration cuts. But those cuts, along with a slew of other fiscal measures enacted by Congress, amounted to a year of fiscal austerity that took money out of the economy, slowed GDP growth and cut the number of jobs that could have been created.
The tightening began on the first of the year, when the "fiscal cliff" deal passed both houses of Congress and was signed by President Barack Obama. While the deal did stop some sharp tax increases that would have put a real drag on economic growth, it allowed the payroll tax holiday to expire, meaning all workers got less money in their paychecks. Predictions made around the time the deal was crafted estimated it would shave between 0.4 and 0.6 percent off of GDP growth in 2013.
That deal delayed sequestration cuts for two months, and they began on March 1. The plan mandated $85 billion in across-the-board spending cuts until Oct. 1. The cuts damaged the public defender system, stalled cancer research and cut scientific research. The cuts also hit programs for the most vulnerable, including Head Start and Meals on Wheels.
The economic effects of these policies are tangible. According to the most recent estimates from the Congressional Budget Office, made in early 2013, sequestration was expected to cost around 750,000 jobs that would have been created or retained if not for the cuts. CBO also estimated that sequestration along with fiscal tightening would cost about 1 ¼ percentage points in growth from the fourth quarter of 2012 to the fourth quarter of 2013. The CBO also estimated that without sequestration, the economy would have been expected to grow faster in 2013 by about 0.6 of a percentage point.
Independent research firm Macroeconomic Advisers estimated in October that budget tightening had reduced annual GDP growth by 0.7 of a percentage point since 2010 and raised the unemployment rate by 0.8 percent.
Repealing the sequester would create economic dividends. Canceling sequestration would increase third quarter GDP in 2014 by 0.7 percent and increase payrolls by 0.9 million, according to a Congressional Budget Office estimate from July. The budget deal signed by President Barack Obama this week replaces about a third of these draconian cuts that were scheduled -- eliminating $63 billion out of an estimated $180 billion in cuts in 2014 and 2015.
On Oct. 1, Congress did not pass an appropriations bill, and the government shut down for 17 days. During that time, more than 800,000 federal workers were furloughed without pay, and nonessential federal offices were closed.
Congress passed an appropriations bill funding the government at current levels on Oct. 17. Federal workers received back pay, and the government reopened. However, the shutdown had economic costs. According to the White House Council of Economic Advisers, it shaved off an estimated 0.25 percent of annualized GDP growth in the fourth quarter, or about $10 billion.
On Nov. 1, food stamp benefits were cut by $5 billion when legislation from 2010 that reallocated funding went into effect. The cut affected 47 million Americans, and reduced the maximum benefit from 11 to 36 dollars, depending on family size. With the cut came a jump in the need at soup kitchens and food banks.
The costs to the economy could be more than $5 billion -- Moody's Analytics has estimated that every additional dollar spent on food stamps generates about $1.74 in economic activity. JPMorgan Chase Chief Economist Michael Feroli estimated that the cuts could shave 0.1 of a percentage point off the annual growth rate of the nation's GDP in 2013.
Despite the cuts, the economy grew at a relatively fast pace of 4.1 percent in the third quarter of 2013, up from 1.1 and 2.5 percent in the quarters before. However, the growth rate may not reflect true economic activity. As Slate's Matt Yglesias points out, real gross domestic income -- an alternative measure for GDP measuring all incomes of an economy -- grew by a much lower 1.8 percent. Plus, with all of the cuts enacted by Congress, many Americans hardly feel like the economy is getting better. Moreover, the economy remained about 3.1 percent below its potential output in 2013, according to OECD, and about 5 million jobs short of full employment, according to CBO.
The cuts will continue into 2014. On Saturday, 1.3 million Americans will lose their unemployment benefits, as Congress failed to extend the benefits before adjourning for the year. Federal benefits tend to kick in after state ones expire, which in most places is 26 weeks. Congress could reinstate the benefits retroactively once it returns at the beginning of next year, but recipients will at least face a lapse. The White House Council of Economic Advisers has estimated that not extending the benefits would cost 240,000 jobs in 2014. Estimates from the Congressional Budget Office and JP Morgan have pegged the cost to GDP growth at 0.2 to 0.4 percent.