The Consequences of Sequestration

budget signWith Congress once again unable to reach any type of deal, it appears as though the US was able to vault the fiscal cliff only to fall right back into the pit of sequestration. This threat of the budget sequester—in other words, automatic, across-the-board cuts in funding—is soon to become a painful reality that would significantly hamper US economic growth.

The cuts were born of the epic 2011 fight over the debt ceiling. The idea was to create a “trigger” so onerous and indiscriminate that both parties would have an incentive to devise a smarter way to reduce deficits. Instead, the bipartisan committee was unable to reach an agreement and now Congress is faced with the undesirable but increasingly likely prospect of sequestration. This would mean $109 billion in automatic spending cuts, with defense spending being cut by 13 percent. The sequester would also lead to a short term contraction in GDP, since government spending is a component of GDP calculation. This contraction in growth would be compounded by Federal Reserve policy. For example, IMF research suggests that under current conditions, with slack in the economy and the central bank’s policy rate close to zero, the multiplier on government spending may be higher than normal. Moreover, the substantial cuts in spending would force the federal government to decrease pay and lay off government employees, an event that is highly adverse to both US economy and morale.

All this could be avoided if Republicans and Democrats can concede on issues closest to them. For Republicans, that would be tax increases, whereas for Democrats, that would be entitlement spending. Despite both sides wanting to avoid the sequester, it seems that Republicans and Democrats are unwavering in their stubbornness and it is becoming less and less likely that a deal will be struck before the March 1st deadline. It is a testament to the ineptitude of the Congress if they allow the sequester to inflict economic harm that could have been circumvented through logic and compromise. Instead, it remains to be seen whether the sequester will take effect or if another down to the wire political spectacle awaits.

Posted by: Matthew Goldberg

Sources: Economist, CNN Money, Forbes

Photo Credit: budget courtesy of flickr user 401(K) 2013

Fiscal Cliff Temporarily Averted

fiscal cliff
President Obama’s signing of the deal agreed upon by Congress to avert the “fiscal cliff” may have allowed Americans to stop holding their breath over the impending sequestration, but no one is breathing a sigh of relief quite yet.

An agreement was made between the House and the Senate regarding taxes but delayed other tough decisions on spending cuts.  Congress agreed to make the Bush-era tax cuts permanent while raising taxes on the wealthiest Americans. Yet, Americans are likely to see smaller paychecks, since the lowered payroll tax rate expired on January 1.  The bill also extends unemployment insurance and delays cuts on R&D and education but with many more deadlines coming soon, it is unsure what cuts will continue to be spared.

Despite signing off on an agreement, Congress still faces three other cliff-like deadlines over the following months. The debt ceiling still looms overhead and failure to address this could lead to further downgrade of the country’s credit rating and stock market plummets.  The threat of sequestration must be faced again in two months. Furthermore, the current continuing budget resolution is set to expire on March 27th.

Hopefully, with Congress beginning afresh, they can put the past behind them and work together to jumpstart the American economy.

Posted by: Elizabeth White

Sources: CNNMoney, Financial Times

Photo source: flickr user MyEyeSees

From AAA to AA: a Projection for the US following the Fiscal Cliff

AAIf the US goes over the fiscal cliff there will be more financial repercussions than $600 billion in expiring tax cuts and instant spending cuts. According to Fitch, one of the top three credit rating agencies in the world, the cliff will also cost the US its top rating of AAA.

The agency’s biannual report states, “If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the US sovereign rating could be subject to review, potentially leading to a negative rating action.”

Standard and Poors infamously downgraded the US in August of 2011 to AA+ following a similar episode of partisan in-fighting over the debt limit. With a lack of communication on the Hill once again threatening the nation’s credit rating, an important measure for investors of economic health and stability, lies at risk.

The US economy is projected to contract by 5% if Congress does not avert this financial “dooms-day” but if they can, growth will slow to 1.5%. “A multi-year deficit reduction plan to stabilize U.S. debt and public finances [is] likely to see the country keep its AAA rating” and adopt the better of the two bad scenarios for US growth.

Congress should keep this in mind during the final days of negotiations as an added incentive to come to agreement. America’s future path hangs in the balance: will the decline be reversed and the AAA rating rightfully remain, or will the fiscal cliff and the subsequent AA+ downgrade occur? In less than 11 days the answer will be clear.

Posted by: Sophia Higgins

Sources: Reuters, the Hill

Photo Credit: From AAA to AA @ photostream courtesy of Flickr user fdecomite

Don’t let U.S. science and technology go off the “cliff” — ACS

Citigroup cuts 11,000 jobs

Tighten Your Belt - AusterityInternational financial conglomerate Citigroup announced on Wednesday, December 5th that the company will lay off 11,000 workers and take $1 billion in pre-tax charges to fourth-quarter earnings. Following the company’s official statement, Citigroup shares rose almost 4% so far on Wednesday morning.

Citigroup joins the ranks of big banks which have made major employee cuts in recent years: HSBC and Bank of America have cut 30,000 jobs, respectively, and UBS is set to cut 10,000 more positions from its rosters. Citigroup job cuts are focused in three sectors of the company, with 6,200 jobs eliminated from consumer banking, 2,600 jobs to be cut in operations and technology, and 1,900 jobs lost from the institutional clients branch. The cuts represent about 4% of the company’s total workforce. These actions represent an effort on the part of recently-appointed CEO Michael Corbat to streamline the third largest bank in the nation and to eliminate inefficiency.

“We have identified areas and products where our scale does not provide for meaningful returns,” announced Corbat. “We will further increase our operating efficiency by reducing excess capacity and expenses.”

In fact, Citigroup has predicted that the job cuts will lose the company money: about $300 million initially. However, Corbat then predicts that this loss will be balanced with a savings of $900 million in 2013 and about $1.1 billion each year after. He states, “These actions are logical steps in Citi’s transformation. While we are committed to – and our strategy continues to leverage – our unparalleled global network and footprint”.

Perhaps this new wave of drastic measures taken by businesses to remain above water will further motivate legislators to take the necessary steps to resolve the nation’s financial issues. With only weeks remaining before the impending fiscal cliff, these issues should be at the forefront of both legislators and constituent minds.

Posted by: Sophia Higgins

Sources: Forbes, Reuters, New York Times

Photo credit: Tighten Your Belt- Austerity @ photostream courtesy of Flickr user kenteegardin

Wall Street Improves as Congress Meets on the Fiscal Cliff

On Monday, November 19th the DOW Jones Industrial average rose by 207 points and the S&P gained 2%, marking the second day of improved performance for Wall Street after a 5.3% drop of the S&P index after Election Day. The likely result of this improvement is lawmakers coming together to discuss the fiscal cliff, an imminent financial threat to investors and consumers alike.

In the words of Jeff Morris of Standard Life Investments, “”Constructive comments over the weekend are key for the market to feel like, in this postelection environment with all the intense partisan politics, the two parties will be able to get together to avoid the fiscal cliff that would put the economy back in contraction.”

The cliff, set to be reached on January 1st, 2013 will result in staggering tax increases coupled with extreme spending cuts if Congress and the executive do not find a resolution. The pressure of this situation and the post-election daze coupled with controversial European debt negotiations has negatively impacted the domestic financial outlook.

Nevertheless, several companies have claimed gains since Friday, including the top two achievers Lowe’s and Tyson Foods with a 6.2% rise and 7.8% respectively. Intel, however, saw a loss of .04% due to the retirement announcement of current CEO Paul Otellini who will step down in May. Hopefully in the coming weeks before the New Year, Congress can sit down and find a bipartisan solution to the impending crisis not only for the sake of Wall Street stocks, but for all Americans.

Posted by: Sophia Higgins

Sources: Reuters, Wall Street Journal, New York Times

Photo credit: Rep. Charlie Bass, R-NH @ photostream courtesy of Flickr user Talk Radio News Service