As economic policy goes, experts say, the automatic spending cuts that kick in Friday are – to use a technical term – bone-headed.
Associated Press reported that fortunately, the self-inflicted wound is not going to leave a deep scar on an economy that is otherwise looking pretty good. It is a fiscal speed-bump on the road to economic recovery, which is why the stock market is nearing an all-time high despite Washington’s latest display of legislative paralysis.
That is a marked change from the past two years, when budget battles rattled consumer and business confidence and triggered big selloffs.
“Businesses and consumers have begun to look away from the histrionics and the battles going on in Washington,” says Bernard Baumohl, chief global economist at the Economic Outlook Group. “They’re beginning to realise that organic growth in the private economy is beginning to pick up speed.”
From Wall Street to Main Street, Americans are too busy spending, hiring and investing to panic over Washington’s latest budgetary melodrama.
They’ve seen this movie before. And this time, the ending doesn’t scare them.
Even with Friday’s trigger date for the cuts drawing near, Americans have been pouring money into the stock market. The Dow Jones industrial average has jumped nearly eight per cent this year and is approaching a record high.
Consumers are also growing more confident. And last month, orders for US factory goods that reflect companies’ investment plans surged by the most in more than a year. It showed that more businesses have become more upbeat about their prospects.
Only 27 per cent of Americans surveyed for a Pew Research Center/USA Today poll last week said they had heard a lot about the looming spending cuts. And according to a Washington Post poll conducted late last month, less than a third of Americans said they thought the cuts would have a big impact on their own finances.
The stakes are not nearly as high as they were two months ago, when lawmakers engaged in a budget standoff over the so-called fiscal cliff. Economists had warned that the cliff’s tax increases and spending cuts would send the economy back into recession if they remained in place for much of 2013.
By contrast, no one is talking about a recession this time, no matter what Congress does or doesn’t do. The financial squeeze will be milder. And it will be delayed.
For one thing, the cuts are smaller than they seem: Actual spending will likely drop $44bn in the budget year that ends September 30, according to the Congressional Budget. That’s only slightly more than one per cent of federal spending.
Of that, about 80 per cent will come from discretionary programs, which includes everything from environmental protection to defense spending. The rest will come from Medicare and other entitlement programs.
Federal agencies must give workers a month’s notice before imposing furloughs, which will likely force many to take one day a week of unpaid leave indefinitely. So the pay and spending power of government workers and many contractors won’t be affected until April at the earliest.
Perhaps more important, the delay gives lawmakers time to seek a deal that might retroactively reverse the spending cuts before they could do much damage to the economy.