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The Sequester Jeopardizes the Recovery: Koutoulas

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Washington is often full of surprises but none are expected before tomorrow, March 1, when $85 billion worth of automatic government spending cuts, a.k.a. “The Sequester” begin to take effect.

The sequester is part of a broader $1.2 trillion plan to cut spending and reduce the deficit that Congress and the White House agreed to in August 2011 in order to avoid a debt ceiling crisis. But it was never supposed to happen.

By including cuts to defense – a Republican sacred cow — and social programs like Head Start — a Democratic favorite — the Washington crowd assumed that a compromise would be worked out on spending and revenues in order to avoid automatic spending cuts.

Never assume, especially in Washington.

Now, less than a day away from the sequester deadline no one is betting against the cuts from taking effect.

The White House has been issuing reports throughout the week detailing the spending cuts in all 50 states and their potential impact, citing slowdown in Superstorm cleanup in New Jersey, teacher layoffs in Ohio, military base cuts in Texas and California etc. and blames it all on Republicans.

Related: While Sequester Looms, Congress Eyes Next Fiscal Deadline

"There are too many Republicans in Congress right now who refuse to compromise even an inch when it comes to closing tax loopholes and special interest tax breaks. That's what's holding things up right now," President Obama told a group of shipyard workers in Newport News, Virginia.

Republicans say the White House is using scare tactics when discussing the spending cuts and they continue to oppose tax increases in addition to the ones already agreed upon. “Mr. President, you got your tax increase. It's time to cut spending,” House Speaker John Boehner (R-Ohio) said earlier this week.

Cuts are slated for 1,200 different programs and could be extended to thousands of more sub-programs and projects. Defense accounts for about half the $85B in cuts; discretionary programs the rest.

Social Security is exempt and Medicare subject to only a 2% cut to providers such as hospitals and doctors. There could be delays in payments for disability claims, delays at airports and even tax refunds

“The big problem with the sequester is [cuts] in the wrong places,” says James Koutoulas, CEO of Typhon Capital Manager and president of the Commodity Customer Coalition. “It jeopardizes this recovery which could make deficits even bigger if you crease tax revenues as well.”

The recovery is fragile. The latest read on fourth quarter GDP shows 0.1% growth—revised from the initial report of 0.1% decline but still almost no growth at all. The Congressional Budget Office says the sequester will reduce growth by 0.6% so it could possibly erase any growth at all — if it’s less than 0.6% otherwise.

Related: The Sequester is Awful and Obama Didn't Even Try to Stop It: Prof. Bill Black

As the countdown continues votes are scheduled for the Senate today on two very different proposals to avert the sequester, but none are expected to pass. Democrats have a bill that would replace the cuts with a more gradual plan to shrink the deficit by raising taxes on millionaires and cutting farm subsidies.

Republicans have a plan to give the White House discretion to allocate the $85 billion cuts as it wants, putting the onus—and blame—for the cuts on the Administration. Tomorrow President Obama is scheduled to meet with Republican and Democratic Congressional leaders but at this point little progress is expected.

Related: While Sequester Looms, Congress Eyes Next Fiscal Deadline

The president favors some tax increases and closing tax loopholes along with some spending cuts. Republicans won’t agree to more tax increases.

There's no “easy, one-stop panacea," Koutoulas says. “Equilibrium is really the key to having a successful system.”

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