2013
Macroeconomics 2020
Natalie Parisi
[MACROECONOMICS, FISCAL
POLICY, AND THE BUDGET
SEQUESTRATION]
Macroeconomics Term Paper: A Look at the Impact of Fiscal Policy’s
Budget Sequestration
Macroeconomics, Fiscal Policy, and
Budget Sequestration
Defining Macroeconomics
Macroeconomics is a portion of economics and it is a broad field of study. It is one of the two disciplines
used to explore an economy. It deals with the performance, structure, behavior, and decision-making of
an economy as a whole, rather than as individual markets. This includes regional, national, and global
economies (Blaug, 1985).
Macroeconomists study GDP, unemployment rates, and price indexing to understand how the
whole economy functions. They look at these through aggregated indicators. Macroeconomists develop
models that explain the relationship between such factors as national income, output, consumption,
unemployment, inflation, savings, investment, international trade and international finance (Sullivan
and Sheffrin, Pg. 57).
Macroeconomic models and their forecasts are used by both governments and large
corporations to assist in the development and evaluation of economic policy and business strategy
(Bouman, 2011).
Macroeconomic policy is usually implemented through two sets of tools: fiscal and monetary
policy. Both forms of policy are used to stabilize the economy, which usually means boosting the
economy to the level of GDP consistent with full employment (Mayer, Pg. 495).
Identifying and Defining the Role of Fiscal Policy
Fiscal policy is the use of federal government expenditures and revenues from
taxation used as instruments to influence the economy. If the economy is
producing less than potential output, government spending can be used
towards idle resources and will hopefully result in boosting output (Miller, Pg. 278). Government
spending does not have to make up for the entire output gap. There is a multiplier effect that boosts the
impact of government spending (Miller, Pg. 265-266).
Fiscal policy headed by the government has proven to be financially unstable because the
government has a much harder time properly financing the economy, due to the fact it is difficult to find
the necessary resources to fund the economy (Mankiw, 1990). Add to that the increased budget deficit
and the continued funds spent through government fiscal policy and you have a financial disaster for
future generations to deal with, not to mention the effects on our economy today and in the near
future.
Introduction of the Budget Sequestration
One tool that has been introduced and implemented to help with this problem of financing the economy
is the budget sequestration. Sequestration is a fiscal policy procedure adopted by Congress to deal with
the federal budget deficit. It is the massive automatic spending cuts to U.S. defense and non-defense
spending. In simple terms, it's a way of forcing cutbacks in spending on government programs and then
using that money to pay down the deficit (Koba, par. 1). The deficit refers to the difference between
government receipts and spending in a calendar year.
Sequestration first appeared in the Gramm-Rudman-Hollings Deficit Reduction Act of 1985.
The Reduction Act of 1985 aimed at cutting the budget deficit, which at the time was the largest in
history, and provided for automatic spending cuts, referred to as sequesters, if the deficit exceeded a
set of fixed deficit targets. The act did provide a balanced federal budget for a year, but it failed to
permanently keep budget deficits from growing (Johnson, par. 1).
Sequestration is now in Play
Sequestration is important because it was part of the 'fiscal cliff' that would have eliminated the Bushera tax cuts while implementing across-the-board cuts on certain federal programs and defense
spending. The fiscal cliff was avoided by a last minute deal in December 2012 (Koba, par. 3). The deficit
reduction sequester is designed to enforce savings of $1.2 trillion through 2021. For 2013 and each year
after that, it means roughly an $85 billion cut in defense and non-defense spending (Koba, par. 7).
Congress was unable to reach agreement on spending cuts as of January 2013, and the
sequestration was delayed until March 1, 2013 as part of the American Taxpayer Relief Act of 2012. This
Act was the deal that prevented the full 'fiscal cliff ' from happening (Koba, par. 3).
The delay until March was to give lawmakers more time to agree on which programs would
actually receive spending cuts, and intended to motivate both parties to an agreement, which did not
happen.
On March 1, 2013 it reached its deadline and talks to prevent it failed (Koba, par. 5).
Based on the calculations for the sequestration,
spending on government programs will be
reduced by $984 billion over that nine-year
period. The remaining amount of savings (to get
to the $1.2 trillion) will come from reduced debt
services costs, like the amount due on the debt
interest (Koba, par.8). This includes programs like
the Department of Defense, Transportation
Security Administration, Federal Aviation Administration, Internal Revenue Service, and the Food Safety
Inspection Service. Among a few others, it also affects Education (see chart), Emergency Assistance for
Disasters, Prisons, Energy and National Parks. What it doesn’t affect are programs like Medicaid, Social
Security, and Temporary Assistance for Needy Families, Supplemental programs, Veterans Affairs, Pell
Grants, Public Trust Funds, and the Unemployment Trust Fund (OBM Report).
The Bottom Line of the Sequestration
While the money diverted might help reduce the government deficit, there are fears that drastic cuts in
government spending could slow down U.S. economic growth.
As reported by The Office of Budget and Management, which is non-partisan and helps the
President set the budget, sequestration results might differ based on changes in law and ongoing legal,
budgetary, and technical analysis (Koba, par. 34).
But the report leaves no question that the sequestration would be "deeply destructive to
national security, domestic investments, and core government functions (OMB Report)."
There is plenty of argument between the two parties as to
where the cuts need to happen. Democrats want cuts to non-defense
spending, while Republicans want cuts to come from Social Security
and Medicare, Medicaid, and on limiting defense (Koba, par.32).
Since no agreement was reached by March 1, the president started
sending out furlough notices to government workers on Monday, March 4.
How This Applies to Me
I work for JetBlue Airways as a reservations crewmember and for weeks there have been threats of the
looming sequestration and its impact on Air Traffic Control.
On April 21, while working my normal shift, I received an email stating that, “due to the
sequestration federal budget cuts, the FAA has(d) begun implementing across-the-board cuts to staffing
at all ATC Centers, Tracons, and U.S. airport towers effective immediately, Sunday, April 21, 2013
(email#1 attached).” The email went on to say that the impact would be unknown for a few days, but to
expect significant delays.
For the past several days I’ve dealt directly with the impact. Hundreds of delayed flights and
thousands of angry customers wanting answers for something they were not even aware of. I explained
over and over that due to the budget sequestration the amount of security personnel and air traffic
controllers had declined but the amount of aircraft in flight operation had not changed. I’ve had to
explain how that impacts screening line wait times and flight schedules. I have made several
recommendations, at the urging of our Executive Staff, for customers to reach out to their
representative and senators in Congress through the Don’t Ground America website. I also encouraged
people to reach out to the DOT and the FAA letting them know of the opposition to the furloughs that
are negatively affecting the airline industry (email#2 attached).
It didn’t take long. On April 26th, Congress passed a Bill to end the FAA furloughs. I can’t wait for
operations to resume as normal and for the airline industry to get back on schedule (email#3 attached).
The sequestration isn’t going to have a positive response from everyone. No matter how
government chooses to cut spending through this program, someone will be affected in a negative way.
Unfortunately it has to happen. The real question is what cuts have the least amount of negative impact
to the economy for individuals and businesses. This sequestration only benefits the government in the
short-run. It may have a positive end result in the long-run, but people aren’t willing to give up today for
what “might be” tomorrow.
Works Cited
Blaug, Mark (1985), Economic Theory in Retrospect, Cambridge, UK: Cambridge University Press, ISBN 0521-31644-8. Web. 25 Apr. 2013.
Bouman, John (2011), Principles of Macroeconomics -Comprehensive Principles of Microeconomics and
Macroeconomics, Columbia, Maryland. Web. 27 Apr. 2013.
Johnson, Paul M. “A Glossary of Political Economic Terms,” Department of Political Science, (2005):
Auburn University. Web. 27 Apr. 2013.
Koba, Mark. “Sequestration.” CNBC. NBC Universal, 14 Jan. 2013. Web. 25 Apr. 2013.
Mankiw, N. Gregory. "A Quick Refresher Course in Macroeconomics". Journal of Economic Literature 28
(4): Dec. 1990. p. 1645–1660. Web. 25 Apr. 2013.
Mayer, Thomas (2002). "Role of Monetary Policy". In Snowdon, Brian; Vane, Howard. An Encyclopedia of
Macroeconomics. Northhampton, Massachusetts: Edward Elgar Publishing. pp. 495–499. Print.
Miller, Roger L. Economics Today: The Macro View. 16th ed. Boston: Addison-Wesley, 2012. Print.
Sullivan, Arthur; Steven M. Sheffrin (2003), Economics: Principles in action, Upper Saddle River, New
Jersey 07458, Pearson Prentice Hall, p. 57. Print.
Images:
http://bipartisanpolicy.org/blog/2011/11/bca-sequester
http://www.debt.org/2013/02/18/sequestration/
http://www.npr.org/2013/03/01/173170211/double-take-toons-sequestration-frustration