February 26, 2013

Obama on Sequester: ‘No Smart Way’ to Cut $85 Billion in 7 Months

While sequester cuts will build over time, they will add a 0.6 percentage-point drag on growth, says Bernanke

House Speaker John Boehner, left, said senators should House Speaker John Boehner, left, said senators should "get off their ass" and pass a replacement plan. (Photo: AP)

President Barack Obama urged lawmakers Tuesday to act immediately to stop the $85 billion in sequestration cuts that take effect on Friday.

“When you’re cutting $85 billion in seven months, there’s no smart way to do that,” Obama said during a speech to shipbuilders in Newport News, Va.

The nation’s jobs “are in jeopardy because of politics in Washington,” Obama said. “Congress might allow immediate, painful, arbitrary cuts to take place.”

“Only Congress has the power to pass a law to stop these damaging cuts. None of us will get 100% of what we want; Democrats will have to make some tough choices too."

Obama told the audience of shipbuilders to "stand up and speak out; Congress will listen.”

But Politico reported that House Speaker John Boehner, R-Ohio, told Republicans during a closed-door meeting on Capitol Hill the same day that the House doesn’t need to pass a third sequester replacement bill before the “Senate gets off their ass and passes it once.”

Obama criticized Republicans in Congress during his speech for not agreeing to cut out the government programs “we don’t need,” saying the sequester uses a “meat cleaver approach.”

While “the impact of this sequester won’t be felt overnight, it will be real,” he said. Already, he continued, “the uncertainty around these cuts are having an effect—companies are preparing for layoffs and families are preparing for cuts.”

Indeed, Fed Chairman Ben Bernanke said in testimony before the Senate Banking Committee the same day that the sequestration cuts—like furloughs and spending cuts—will “build over a period of time” and “would not take place immediately.”

Citing Congressional Budget Office (CBO) estimates, Bernanke said in his testimony that deficit-reduction policies in current law would “slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise.” A “significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year.”

Given the “still-moderate underlying pace of economic growth,” Bernanke continued, “this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”

Bernanke went on to say that to address both “the near- and longer-term issues, the Congress and the administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.” Such an approach, Bernanke said, “could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”

As to current economic conditions, Bernanke said that since his last report to the Senate in mid-2012, economic activity in the U.S. has “continued to expand at a moderate if somewhat uneven pace.”

In particular, he said, “real GDP is estimated to have risen at an annual rate of about 3% in the third quarter but to have been essentially flat in the fourth quarter. The pause in real GDP growth last quarter does not appear to reflect a stalling out of the recovery. Rather, economic activity was temporarily restrained by weather-related disruptions and by transitory declines in a few volatile categories of spending, even as demand by U.S. households and businesses continued to expand. Available information suggests that economic growth has picked up again this year.”

He went on to say that “consistent with the moderate pace of economic growth, conditions in the labor market have been improving gradually. Since July, nonfarm payroll employment has increased by 175,000 jobs per month on average, and the unemployment rate declined 0.3 percentage point to 7.9% over the same period.” Cumulatively, Bernanke said, “private-sector payrolls have now grown by about 6.1 million jobs since their low point in early 2010, and the unemployment rate has fallen a bit more than 2 percentage points since its cyclical peak in late 2009. Despite these gains, however, the job market remains generally weak, with the unemployment rate well above its longer-run normal level.”

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