The Sequester

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On March 1, automatic budget cuts in the federal budget known as the “Sequester” will kick in unless Congress acts to stop them. Local economist Jim Rounds of the Elliott D. Pollack Company will discuss the impact of possible cuts on Arizona.

Ted Simons: Good evening. Welcome to "Arizona Horizon." I'm Ted Simons. The deadline to avoid $85 billion in across the board federal budget cuts is Friday with little evidence a solution is in the works. For Arizona, the sequester would mean significant cuts to military and education funding. Other areas impacted would range from child care to nutrition programs for seniors. Here to tell us more about the sequester's possible effect on Arizona is economist Jim Rounds of Elliott D. Pollock and Company. Good to see you.

Jim Rounds: Good to see you.

Ted Simons: More or less than other states do you think?

Jim Rounds: It's difficult to say. A decent percentage of our economy is based on military operations, which is the dominant discussion we're hearing from the sequester material. But I think it depends on what the state of the economy is compared to some of the other states. Arizona is a top five state in terms of employment growth. We can probably accommodate a lot of the sequester related job cuts much more so than, say, a California or some of the other states that are just barely bouncing along avoiding another recession.

Ted Simons: Let's talk about the impact. How many jobs? I have seen everything from 20,000 to 50,000 jobs lost and the impact on the economy from four to $5 billion over all. Are these ballpark figures?

Jim Rounds: People are guessing quite a bit I think. A lot of studies, I have read a number of them, there seem to be significant flaws. They start with values that are way higher than we're discussing, the $85 billion. The impact on the economy in general I don't think they are really picking up the fact that this stuff has to be phased in. For example one study said we would lose 50,000 jobs in Arizona. It is assuming that this will happen right away, this doesn't happen right away. You have direct business activity that could be cut. The military operations, the contractors, but then it might take another year or so before you see the full dynamic impact. Whatever impact is realized is going to be spread over a couple years. Our job growth projections are pretty decent for the next couple years so it's a pretty small percentage of our projected job growth.

Ted Simons: but does that job growth dorks those predictions, are they predicated on things staying somewhat the way they are because of if the sequester goes through they won't be the way they are.

Jim Rounds: If the sequester doesn't go through we're looking at adding in Arizona 130 to 150,000 jobs in the next two years. Our best estimate from reading everything out there is that Arizona will lose about 30,000 jobs over a two-year period, probably worst case scenario. I have a feeling, though, we won't realize that. It will probably be half of that, so still a relatively small percentage of the economy. That's statewide. Even the greater Phoenix area may be able to weather this okay. It's not as dire as what we are reading but you talk about communities like Sierra Vista onto others that are very dependent on military spending, they could run into some problems over the next decade or so.

Ted Simons: The growth rate in the valley, some are projecting a 3% growth rate for the greater Phoenix area. Ballpark figure there, how much is that impacted by this?

Jim Rounds: If the full sequester impact is realized based ongoing our estimate of the worst case about 30,000 jobs over two years, that cuts 20 to 25% off of our growth. So we're still going to be adding jobs at a pretty decent clip. We'll still be a top five state in terms of our over all employment growth and I think we'll be just fine. It comes down to having a more regional impact. Smaller regions in Arizona will be much more impacted in the state but I'm not worried statewide based on our economic recovery to this point.

Ted Simons: smaller regions and areas around military bases you're not only talking jobs lost with department of defense employees but contractors down to someone who runs a restaurant frequented by these people.

Jim Rounds: right. The spending cuts occur. If they can't work out some kind of compromise it's going to translate into reduced money for contractors, maybe working fewer days each week or just some significant cuts all together. Then over the next several months you see whenever we do economic impact studies we say here's the impact from that company and here's all the other thousands of other spinoff jobs. When you lose activity, you lose those spinoff jobs. Those are the jobs that I think will be lost over the longer period, over maybe two year period. That's why we think is more of a phased in analysis rather than we're going to realize a cliff and we fall off and everything is impacted right now.

Ted Simons: You're saying most of that would be focused at or near military bases.

Jim Rounds: Well, the lion's share of the cuts have to do with Department of Defense because some of the entitlement programs, there's protected programs. We're not going to see cuts to Social Security. I think Medicaid listed as something that won't be impacted. Medicare only in a limited way. They have to focus in certain areas. That's why you hear the sequester that will have a little bit of an impact, four, 5% in terms of cuts, but to certain industries like military I think it was an 8% reduction estimate that's assuming that the full impact will occur.

Ted Simons: Have we already seen the effects of sequester even though it has not taken effect yet? Has the threat impacted the economy?

Jim Rounds: Yes. The uncertainty -- not only from the budget cuts but also from the tax increases that we talked about a couple of months ago, those have been impacting the economic numbers for last half year or so. Some of that is already in the base. Companies have started to adjust knowing that Department of Defense spending is going to be going down in the future and they are trying to reconfigure what kinds of products they are making, so not the old type of defense industries we have been talking about, some companies are talking about how can we shift to new types of defense spending and maybe private sector operations that are very similar. So there's already been some adjusting occurring.

Ted Simons: So we should mention education, $17 million in Arizona regarding primary and secondary education, could be a few hundred jobs at risk there, the environment, public health programs, grants to prevent and treat substance abuse, these are all thrown in there as well. These will have an impact as well.

Jim Rounds: yes, there's a little bit for everybody in the budget cuts.

Ted Simons: But we were talking about how this is something that is spread over time, so when March 1 hits and nothing is done the curtain doesn't fall and all you know what breaks loose.

Jim Rounds: Think about what sequester is. It just means there are some forced cuts in the budget what. Can you do? You can change that the next time Congress meets about the budget. So the first thing they will do is try to give a little more flexibility on where the cuts occur. Instead of across the board everywhere, they will be able to cherry pick a little bit more. So they can weed out some of the programs that maybe aren't as efficient, aren't as needed. Then it's going to take several months before these things can be implemented and by then Congress will have plenty of time and lots of their constituents complaining to them about how their state is being impacted. I think there will be at least a little bit of compromise. While it sounds like we're hitting a wall, something has to happen this date, it's not quite that clear.

Ted Simons: So in other words, the deadline is there but until something tangible happens, folks back there are just waiting around.

Jim Rounds: Well, I think that's a strategy. I think because it's something where it is more of a soft date than what you hear about typically from the national media, it gives some the ability to do some political posturing and not take action so you might have Boehner say let's sit back and see what happens, let's negotiating on where the cuts occur then reduce the over all impact. What I would like to see happen is the economics behind it and how budgeting works is going to spread this over a couple of years but if they can phase these in over a two or three year period and get to the point where the full impact isn't realized until the economy nationwide, and even in Arizona is in better shape around mid-decade, it won't be nearly as bad. I'm hoping some common sense will come into play, but that's a coin flip in Washington.

Ted Simons: bottom line as far as the effect of these cuts, do you think they are underrated or overrated?

Jim Rounds: It's greatly exaggerated in terms of the Draconian economic impact in my opinion. It's still going to hurt some people, but at some point we have to balance our budget. I'm not totally opposed to sequesteration. I would like to see the government start to get things understand control, but I think we can maybe do it a little more strategically than what they put into play several months ago
Ted Simons: Alright, Jim, thanks for joining us. We appreciate it.

Jim Rounds:Economist, Elliott D. Pollack Company;

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