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The good, the bad and the ugly of sequestration

March 01, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Whether they wanted to or not, Americans have learned a new word in recent weeks: sequestration. Most probably wish they still didn't know it.

The fact is, these budget showdowns between the White House and Congress are getting tiresome. It's like a television show that was bad the first time, and now is already in repeats. It's no wonder the powers that be scheduled all this to occur after the last election: If they knew then what they know now, it's doubtful the voters would have renewed this turkey of a melodrama.

There are actually both good and bad aspects to the $85 billion in automatic budget cuts known as sequestration. Ultimately though, the American people will find it is more than just the process that is ugly about this approach to budget-cutting.

Here are the good, the bad and the ugly aspects of sequestration.

The good

Drastic though the plan is, sequestration would represent a concrete step toward addressing the budget deficit. The national debt has to be addressed, but Washington rarely has the political will to implement specific cuts. Perhaps putting budget-cutting on auto-pilot is the only way to get it done.

Also, budget-cutting needn't necessarily decimate the services government agencies provide. Ask most business managers about the budgets they've dealt with in the economic environment of the past five years. Good managers know how to make do with fewer resources when necessary.

The bad

The bad news is that managers of government agencies aren't as motivated as business managers to make do with less. Their incentive isn't a bottom line, but simply preserving the size of their budgets. From that perspective, the last thing they want to do is demonstrate that they could get by with less money. That explains all the recent news releases dramatizing the impacts the sequestration budget cuts would have on various government agencies. They want to make sure the public feels their pain.

Meanwhile, yet another budget showdown, coming just two months after the fiscal cliff showdown, casts one more shadow over the economy. Consumers and businesses cannot be expected to show much confidence when the government forces them to make plans in an atmosphere of disruptive uncertainty.

The ugly

A recent survey by the National Association for Business Economics found that most economists feel that sequestration would shave less than one-half of a percent off of U.S. Gross Domestic Product this year. That wouldn't be so bad except that the economy has already shown signs of faltering. The additional drag of sequestration could kill any remaining momentum the economy had.

That means continued weakness in the job market, which in turn means prolonging the conditions that have led to near-zero interest rates on savings accounts. Perhaps the ugliest part is that by scheduling all this to occur after the election, the folks in Washington made sure they wouldn't be the ones losing their jobs over this -- at least not right away.

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