Goldman Sachs: Sequestration Is Hurting The Economy And Will Get Worse

The automatic, across-the-board budget cuts known as sequestration are starting to hurt the economy broadly, according to Goldman Sachs economist Jan Hatzius.

While Hatzius previously hadn’t seen an impact from sequestration, in a note to clients on Wednesday he said that the pain is showing up in disappointingly low 0.1 percent growth in personal income. He attributed the figure to defense furloughs, which started in July for more than 650,000 workers, causing a 0.5 percent decline in government pay. Without the furloughs in July, which reduced wages by $7.7 billion that month, income growth would have been closer to 0.2 percent.

While the pain may lessen after furloughs end, the author notes that many agencies have resisted hiring freezes and furloughs in the hopes that Congress will undo sequestration. But “we assume that Congress will not reverse sequestration,” he writes, which he estimates will mean the loss of 100,000 federal jobs and even more economic pain. In fact, a preliminary planning document from the Department of Defense showed it grappling with the possibility of having to fire more than 6,000 employees next year if the budget cuts continue.

The economic pain brought about by sequestration is pretty clear. Previous months have shown that it is holding back wages and consumer spending. If it were reversed, the non-partisan Congressional Budget Office has estimated that as many as 1.6 million jobs would be added and GDP would get a boost of as much as 1.2 percent. Even the deficit would be in better shape if the cuts were undone.


And its devastation on many Americans’ lives is hard to understate. Preschoolers have been kicked out of Head Start. Public schools are cutting back. The elderly are getting fewer visits from Meals on Wheels. Domestic violence victims get less support. Low-income families lost their housing vouchers. The homeless have fewer places to turn. The unemployed are receiving less help. Scientists are firing people and closing down projects.