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On Friday, March 1, $85 billion in “sequestration” or automatic spending cuts to the federal government set in.  In the last couple of months, despite expectations, or at least hope, of a deal to address these arbitrary cuts, nothing has been done by Congress and the White House.  However, I’m not sure we should be at all surprised by this inaction.  It seems this is becoming politics as we know it, because even the markets, typically very sensitive to fear and uncertainty, are shrugging it off and continuing to climb.

Setting the Stage

During the Debt Ceiling negotiations in the summer of 2011, a plan was put in place that would entail across the board spending cuts, only to be changed or altered by agreement between Congress and the White House.  That time for automatic spending cuts has come, and it has come without any agreement to alter it.

The Same Old Song and Dance

As we’ve heard a mind-numbing number of times in the past few months, the two sides differ strongly in their ideals: Democrats insist that new taxes be a part of the solution to combating the spending cuts, while Republicans have been hardline in their refusal of increasing taxes on the heels of the recent tax increases associated with the Fiscal Cliff.  Republicans would like to cut the cost of unsustainable federal programs such as Social Security and Medicare.  Obama and Democrats are pushing for a combination of particular spending cuts and increased taxes on wealthy Americans.

What Does Sequestration Entail?

The Pentagon must cut its budget by 13% from March 1 through the end of September.  Other programs, not related to defense, will have to cut their budgets by 9% in that time frame.  This could translate into a slowdown of US economic growth of half a percentage point this year, according to the International Monetary Fund.  In terms of people’s everyday lives, Obama warns that this may mean severe air travel delays due to job layoffs of airport security and air traffic controllers.  More generally speaking, the Congressional Budget Office says 750,000 jobs could be lost this year as a result. 

Goal of Sequestration

The goal of this sequestration plan was to address our spiraling deficit.  However, with the spending cuts happening without a deal, our economic recovery is in danger.  Depending on who you listen to, the effects of this, in reality, are either quite severe or simply exaggerated.

The full extent of sequestration is scheduled to take effect over the course of the next seven months, so officials and administrators are torn on just how quickly, if at all, the impact will be felt by government agencies, and then the general public.  Although Friday, March 1, marked the deadline for a deal before sequestration would begin, Congress can still strike a deal at any point to stop the cuts, but as of midnight Friday, they have officially begun.