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The Economic Consequences of Sequestration

NEW YORK ( TheStreet) -- Sequestration may impose great and unnecessary damage on the U.S. economy. President Obama and Republicans -- so focused on politics and not economics -- have miscalculated on both fronts.

The president has spent the last several weeks campaigning for higher taxes and painting a picture of economic Armageddon if he doesn't get his way -- food shortages, massive airline flight cancelations, and the like -- and civil disorder -- fewer police on the streets and cutbacks in border security. To make the point, federal immigration officials released hundreds of detainees to accommodate budget cutbacks.

Republicans, leaning on economists, are betting the president is overstating his case. Analysts compute slicing $85 billion from federal budget authorizations will not tank the economic recovery.

The Congressional Budget Office estimates that although federal budget authorization will be cut $85 billion, actual spending will be sliced only $44 billion for the fiscal year ending in September.

Furloughed federal employees and contractors will spend less at gas stations and the mall, and considering in this multiplier effect, overall demand for goods and services will decrease about $80 billion or less than one half of one percent of GDP. However, those calculations fail to consider the disruptive consequences of curtailing government activity at critical choke points and provide an example of why thoughtful people often don't take economists seriously.

The U.S. Department of Agriculture plans to furlough meat inspectors, and consequently beef, pork and poultry processors will be compelled, by law, to curtail operations. The unpaid salaries of inspectors are a mere bleep compared to the potential lost revenue in meat packing and up the supply chain in the livestock, feed, fertilizer and agricultural implements industries.

The same applies to furloughs for air traffic controllers and cancelled flights, lost tourism and other impaired business activities; slowdowns in drug approval process and lending activities at the Small Business Administration; and the list goes on.

All those disruptions could impose many times greater losses than the simple multiplier models economists are applying.

Sadly, the president need not impose such pain by trimming $40 billion from $3.7 trillion in federal spending.
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