The furlough effect: Why automatic cuts might not reduce the deficit at all

Updated
A foreclosure sale sign sits in front of a house in Miami Beach, Florida in 2009. 
 REUTERS/Carlos Barria/Files
A foreclosure sale sign sits in front of a house in Miami Beach, Florida in 2009. REUTERS/Carlos Barria/Files
UNITED STATES - Tags: BUSINESS REAL ESTATE

“22 days,” Ken Jacobs remarked. “That’s a month of pay.”

Jacobs is a labor researcher and the Chair of the University of California Berkeley’s Labor Center and he is worried about the dramatic furlough that’s set to hit the Department of Defense’s civilian employees – 22 days for five months – on March 1st. Jacobs has studied furloughs and their detrimental economic effects in California, which implemented some of the country’s biggest public sector furloughs in 2009.

If sequestration is enacted, far bigger furloughs will be enacted all over the country in federal agencies. Those furloughs will hurt economic growth and may counteract the deficit reduction the Sequester provides, the Center for American Progress’s Scott Lilly explained.

“The majority of members of Congress have no idea that they’re messing with something this intricate or this vulnerable to failure, given the kind of games that they’re playing with these agency budgets,” Lilly, a senior fellow at CAP, told msnbc.com, “I’m certainly not someone who says you can’t find excess in these budgets–I’ve spent my life doing that and there’s a lot there we’re not getting a–but this is the wrong way to do it and we’ll generate huge amounts of waste and fraud.”

The Congressional Budget Office says sequestration will reduce the GDP, a measure of economic growth, by 0.60%, but Lilly says that the wider economic effects are uncounted by the Congressional Budget Office.

He writes:

Such estimates, however, are based on macroeconomic modeling, which simply takes the $85 billion cut required by the sequester and extrapolates its impact based on the percentage of total GDP that it represents. But as an economic event, sequestration is likely to have a grossly disproportionate impact. There are hundreds of little bombshells in this package of cuts, and each could seriously impact various segments of the economy in a very disproportionate manner.


He estimates the sequester will reduce the GDP by 1.8%. The full spectrum of damaging sequestration cuts –  including lost revenue, increased waste and fraud, and inefficiency – may actually eliminate the 85 billion sequestration is supposed to cut from the deficit this year, according to Lilly.

Sequestration demands across-the-board cuts, which is forcing many federal agencies to furlough employees as they try need to cut from their payrolls. The widest furloughs come from the Department of Defense, which is planning to furlough its 800,000 civilian employees for 22 days, but experts say even the smaller furloughs – like the 15,000 air traffic controllers who will be furloughed – will have destructive effects.

The problem with furloughs is three-fold: government agencies pull in less revenue and slow private-sector business, furloughed employees spend less in the economy, and worker morale and productivity drops as workers feel the effects of pay cuts.

Hurting profits, including the government’s

Many government employees regulate commerce and bring in revenue for the government. Furloughing these employees both lowers revenue intake and hurts the country’s commerce, as regulation is required by law. “The most notable is the airline industry, which is going to get hammered,” Lilly said.

The airline industry brings in significant user fees through taxing airline tickets; with furloughed air traffic controllers, there will be fewer flights. Airlines will be forced to cut flights to smaller airports, which will hurt commuter airlines and reduce accessibility for those commuters. Security lines will get worse, so fewer people will likely fly; customs officers will also see furloughs, so those lines will be even worse. The combined effect is harsh cuts and damaging effects on both the revenues the FAA brings in and those of the airlines. “I don’t think there is anything as damaging as the FAA [cuts],” he said.

Transportation Secretary Ray LaHood warned of the cuts on Monday’s Morning Joe.

The airline industry isn’t the only regulatory industry whose furloughs will cause serious ripple effects. Inspectors employed by the Food and Drug Administration will also be furloughed. “Plants that are legally obligated to have inspectors on site will have to shut down for a day or two. In those kinds of situations, the multiply effect of taking out that meat inspector out of a plant that employees 300 people is huge,” he said.

The “multiply effect” grows when you look at employees who prevent fraud, waste, and billing or taxing errors, like those who audit Medicare or Medicaid payments (an agency that will see a 9% cut to its monthly budget), work for the Internal Revenue Service (which will see a 8.2%  cut, amid tax refund season no less), and countless others.

Making the mortgage payments

“These are real people who have mortgages on their homes and may be having trouble making their mortgage payments,” Jacobs said.

In the California furloughs that Jacobs studied, nearly 200,000 employees were furloughed for 36 days each over the course of a year.  “Taking into account taxes and employee savings, this is expected to reduce employee spending by $1.24 billion over the course of the year,” he wrote in the report, “The High Cost of Furloughs.”

With federal furloughs–to the tune of nearly one million employees for varying number of days–the effects would be wider spread and more damaging.

“It’s hard to separate the furlough from the [rest of] the across the board cuts in sequestration,” Jacobs noted. “It’s just one element of a bad policy; it definitely has a more immediate effect than some of the other elements. This is where people are immediately cutting back spending.”

“All those workers, those workers spend that money in the local economy. So when somebody is bringing home a much smaller paycheck, they’re spending less,” Jacobs said. “That ripples throughout the economy. This will be especially felt in Virginia, Maryland, but really throughout the country.” In California, they predicted 4,100 lost private sector jobs to decreased spending; Jacobs said a federal furlough would have wider effects.

He also noted that the housing market may be particularly hard hit by the effects.

“We’re digging ourselves out of the housing crisis, to have a big decrease in paychecks for people who are maybe just making their mortgage effect?” he said. “All of this has ripple effects. Remember, the sequester was designed to be something that was unpalatable to everyone. This was not supposed to happen.”

Workers who are furloughed have low morale and increased stress, which in turn decreases productivity and increases errors. Highly-skilled workers leave for more stable employment; all of this decreases revenues in agencies that pull in money, and damages efficiency.

Jacobs noted that it was impossible to quantify how many jobs had been lost or economic growth stalled after furloughs in California and whether their predictions had panned out, but notes that federal sequesters will provide a remarkable case study in how furloughs affect the economy on a wide scale, providing controls (areas with few furloughs) to compare to the areas with many furloughs.

“It’s not an experiment I’d like to carry out,” he concluded.

The furlough effect: Why automatic cuts might not reduce the deficit at all

Updated