The so-called “sequester” cuts in federal spending mandated by the Budget Control Act of 2011 went into effect March 1. In the print media, the blogosphere, and even among respectable analysts, there was widespread apprehension and even alarm about the effects of these cuts on the poor, on government services, and perhaps especially on the economy. Although 4 1/2 months after the start of these cuts is still too early to give a full or authoritative evaluation of their effects, it is not apparent that the cuts implemented so far have had a noticeable effect on the overall performance of the economy.
The mandated cuts amount to only $85 billion in fiscal 2013, but similar cuts are supposed to occur in 2014 and every future year until 2021. The cuts are split evenly in dollar amounts between defense and non-defense sectors, and Medicaid, Social Security, and a few small categories are exempt. The cuts are supposed to be equal in percentage terms in the various categories of federal spending that are affected. The cuts in 2013 are only about 2.3% of total federal spending in this year, although they are much bigger percentages of some discretionary spending categories.
Most of the concern about the effects of the cuts in federal spending and employment on the performance of the American economy stems from an implicit assumption that there would be no offsetting adjustments in the rest of the economy, particularly in the private sector. Yet federal government employees laid off due to the sequester will naturally seek jobs in the private sector, or in state and local government. Although it is still early to detect with confidence the effects on private employment, the changes in both government and private employment since January 2008 are telling. According to data from the Bureau of Labor Statistics published in The New York Times this week, overall government employment, including state and local as well as federal employment, rose by about 3% during the heart of the financial crisis from 2008 to 2010. Since then, it has fallen by 5%, so that government employment is 2,4% below its level at the beginning of 2008. The reason for the fall in employment since 2010 is cutbacks in federal and state and local spending due to tighter budget restrictions on hiring.
Changes in private sector employment are almost the mirror image of what happened in the public sector. Private employment fell by 10% for men and 5% for women until the beginning of 2010, and it has risen by about 7% for men and a little over 5% for women since then. The growth in private employment much more than compensated for the fall in government employment in the last 2 1/2 years, with the result that total employment grew and total unemployment fell, despite the sharp fall in government employment.
Similar changes have taken place during the past several months after the sequester cuts began to affect government employment. Private employment has been growing by about 200,000 workers per month. This is high enough to nudge the unemployment rate down and the employment rate up, although unemployment is still much too high and employment much too low relative to what full employment would look like. During this recent period, federal government employment has been falling by about 5,000 workers per month, so clearly the growth in private employment has swamped the decline in federal government employment. The result has been that total employment has been growing by an amount close to the growth in private employment.
The prestigious Congressional Budget Office predicted that the sequester cuts would reduce overall employment by about 750,000 jobs in 2013, and lower the growth rate of GDP by 0.6 percentage points, which is about equal to the $85 billion cuts mandated by the sequester act. Clearly, this forecast and others in the media are implicitly assuming no offsetting growth in private output and employment.
More detailed studies of separate sectors with longer time series are necessary to determine the causative relation, if any, between the actual growth in private sector and the decline in public sector employment during this year, and since 2010. Nevertheless, one can definitely conclude that the predicted large effects on the overall performance of the economy from the sequester cuts in federal spending have not happened. The evidence available is suggestive that compensating changes in private employment more than offset the effects of the sequester on federal government employment.