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It’s Time To Worry That Our Government Will Wreck Our Economy Again

Henry Blodget

Americans have been granted a pleasant six-week respite from the anxiety that our elected representatives will once again screw up the economy that supports most of us.

In late December and early January, you will recall, the two political parties played a big game of chicken to see who could score the most points in the debt-ceiling and tax-cut-expiration fight. And as part of a deal designed to make each team look like heroes for "cutting taxes" that they could easily have just voted not to raise, a problematic little budget agreement called the "sequester" was kicked down the road a couple of months.

Well, now those two months are over.

And at the end of next week, on March 1st, the "sequester" will kick in.

Unless Congress intervenes, the sequester will trigger about $85 million in annual spending cuts across most government agencies, including the military, the Department of Education, and the Department of Justice. These cuts will result in furloughs, loss of overtime, and probably some layoffs, especially if they are permanent.

The cuts are designed to cut the deficit by about $1.2 trillion over 10 years, and although long-term deficit reduction is a noble goal, the cuts will also hurt the economy this year, when it is weak. The Congressional Budget Office estimates that the sequester cuts, combined with the tax increases earlier this year, will reduce 2013 GDP growth by 1.5 percentage points.

Both parties agree that the "sequester" is lousy policy--the cuts are sharp and indiscriminate across most agencies, including those that are favorites of each particular political team. But both parties voted for the sequester. And neither party is lifting a finger to try to stop the cuts from taking place. So take whatever they say with a grain of salt.

Nor is the sequester the only economic hurdle on the horizon.

At the end of March, the "continuing resolution" that is funding federal government spending will run out. After that date, the federal government will have to shut down unless or until another continuing resolution (or budget) is passed. This creates the possibility that the government will endure a 1995 scenario in which big agencies just close their doors until Congress finally does what it was elected to do.

And then, in May, unless Congress has passed an agreement to delay it, the debt ceiling will return. The debt ceiling, you will recall, is what almost caused the country to default on its obligations back in the summer of 2011 and then again early this year. Our government is using our debt ceiling as a poker chip, and although the Republicans caved a couple of months ago, there's always a risk that they'll decide to hijack the country again.

The bottom line is there are three ways our government can screw up our economy in the next three months.

So don't relax just yet.

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