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Just Explain It: How Will The Sequester Impact The Economy?

Zelkadis Elvi

Lately the news out of Washington has been dominated by “the sequester” or “sequestration.” Yet polling shows most voters don’t even know what the term means.

Sequester means to remove or withdraw. It’s most commonly used in our court system when a jury is sequestered during a highly publicized trail.

In this case, the adapted term refers to a package of automatic spending cuts that will take effect on March 1st -- if Congress and President Barack Obama can’t reach a better deal. The government will actually take back, or remove, some of the funds Congress has released.

Sequestration was part of the 2011 Budget Control Act Congress passed to stave off potential default on the federal debt. The cuts from the sequester – evenly split between defense spending and discretionary domestic spending -- would total $1.2 trillion over the next ten years.

Federal programs like, Social Security, Medicaid, Pell grants and veterans' benefits are exempt from the cuts. Spending on wars will also be spared, but many other Defense Department programs would face the axe.

The across-the-board cuts were intended to force compromise between Democrats and Republicans. Unfortunately there are few signs of progress on a broader deal. President Obama has asked Congress to pass a short-term package to postpone the March 1st deadline. But Republicans are pushing back and say they’ll allow it to be triggered if federal spending and tax reforms aren’t included.

Which brings us to today’s Just Explain It.

How does sequestration impact federal spending? What departments will see cuts? And what’s the impact to the economy and specific industries?

According to the White House Office of Management and Budget, here’s what will happen if there is no resolution.

Law enforcement agencies, like the FBI and Border Patrol, would lose over 1,000 agents. At the same time, the automatic cuts will trim the Department of Defense budget about $500 billion over the next ten years.

Funds for education programs like Title One, special education and Head Start would take a big hit. Over 31,000 teachers and teachers’ aides could be laid off.

$1 billion would be cut from FEMA’s (Federal Emergency Management Agency) budget. Some of that money is earmarked for first responders who react to natural disasters like Hurricane Sandy.

Furloughs at the U.S. Department of Agriculture would lead to fewer inspections at food processing plants. The department would also have to drop about 600,000 women and children from its WIC (Women, Infants and Children) supplemental nutrition program. 1,600 jobs connected to the program could be at risk too.

Up to $540 million in loan guarantees to small businesses would be reduced.

Emergency Unemployment Compensation benefits would be decreased by up to 9.4%. And if the proposed cuts take effect, the Congressional Budget Office estimates 1.4 million jobs will be lost.

Parts of the economy are already showing signs of a slowdown due to uncertainty over the spending cuts. The Gross Domestic Product declined 1.3% in the fourth quarter last year. Some economists say that’s because defense spending dropped by an annual rate of over 22% that same quarter.

Sequestration is a mechanism used to reduce federal spending across the board. There’s a lot at stake and both sides need to come together to avoid the consequences of the proposed cuts.

Did you learn something? Do you have a topic you’d like explained? Give us your feedback in the comments below or on Twitter using #just explain it.