The Sequester: What Does It Mean?

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Every day that passes without a deficit-cutting deal makes it more likely that the federal government will be forced into its first "sequester" in nearly 30 years, a problem of politicians' own making that could suck billions of dollars out of the economy.

The sequester is Washington jargon for using the threat of automatic spending cuts to force action on reducing the debt. The term doesn't mean much to most people outside the capital, and you could be forgiven for assuming that the president and lawmakers will scramble at the last minute to dodge their deadline and set up a new one. That is, after all, how the current predicament came to be.

But politicians are cutting it awfully close, making the risk very real, scholars and analysts say.

And the stakes have arguably never been higher: the sequester is just one of three looming fiscal deadlines, each with its own potentially calamitous impact on the tenuous economic recovery.

"This is unprecedented," said Steve Bell, senior director of economic policy at the Washington D.C.-based Bipartisan Policy Center, who served as staff director of the Senate Budget Committee in the early 1980s, when the last sequester showdown occurred. "I'm a historian of this stuff, and this has never happened together, these things. I don't know what the technical term is down here, but where I'm from, New Mexico and Colorado, we call it 'a goat rope'…chaos and confusion, where nobody knows what's going on."

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The sequester is scheduled to go into effect March 1, triggering the opening phase of cuts that will total more than $1 trillion between now and 2021. Most of the reductions would be divided evenly between the defense budget and non-defense spending that isn't already mandated by law (those mandates include Medicaid, Social Security and food stamps). It is up to the president to decide how to apply cuts to those so-called discretionary spending items.

Then, on March 27, comes a temporary appropriations measure that is keeping the federal government running. Without a renewal there will be a shutdown of all non-essential functions.

Finally, in mid-May, a statutory limit on the federal debt, which has been temporarily lifted, will go back into effect and make it difficult for the country to pay its bills.

The chances of all three of those threats becoming reality remain distant. But given the state of partisan discord, it appears "extremely likely" that the sequester will happen, Bell said.

The last time Congress imposed a sequester was 1986 when Ronald Reagan was president -- with limited results.

The current sequester threat has been driven by a darkening crisis surrounding the federal deficit, which is projected to skyrocket in coming decades, primarily because of the rising cost of health care. A couple years ago, Congress settled a fight over raising the country's debt limit by passing the Budget Control Act, which set a Jan. 2, 2013 deadline to find ways to cut $1.5 trillion from the deficit. A bipartisan committee was assigned to come up with a plan, but it failed. Faced with the combination of the sequester, the expiration of Bush-era tax cuts and a scheduled reduction in payroll taxes—a confluence of events known as the "fiscal cliff"—President Barack Obama struck a deal with Congress. It included letting the payroll tax lapse, raising tax rates for households making more than $450,000 and delaying the sequester to the beginning of March. The fiscal cliff deal also allowed taxes on capital gains and dividends to go up and extended jobless benefits.

The new sequester deadline has prompted another showdown between Obama, who has called for a more "balanced" reduction plan that includes eliminating tax breaks for the wealthy, and Congressional Republicans, who say the president already got tax increases out of the fiscal cliff negotiations and should take full responsibility for the sequester. A GOP alternative plan would spare defense cuts and focus on domestic spending.

For 2013, the sequester means more than $85 billion in cuts, including $42 billion from defense, $28 billion from domestic discretionary spending, and nearly $10 billion from Medicare.

With no deal in sight, the White House has prepared a list of deep, wide cuts that it says could costs thousands of jobs, hurt small businesses, damage the government's ability to ensure food safety, diminish the ranks of law enforcement, and reduce school aid and housing assistance—not to mention the massive impact on the military and defense contractors.

Most of the cuts likely won't effect ordinary Americans for weeks, or months, Bell said, because government agencies will first look for ways to cut costs internally, like canceling training and conferences and repairs and slowing down payments on contracts. Furloughing federal workers is always the last resort.

But eventually, the impact will spread across the country, as payments to government contractors and subcontractors and social service agencies dry up. Those employers will have to contemplate cutting their payrolls. The Bipartisan Policy Center estimates that a million or so jobs will be lost under a full-scale sequester in 2013 and 2014. The economy could lose billions of dollars.

"Instead of the lights going out, think about it as a bulb that gets dimmer, bit by bit, as the light gets less and less," Bell said.

The lights-out scenario could come on March 27, the deadline for a government shutdown. If Congress can't avert that crisis, the country could be in for a huge economic blow, Bell said.

But he doesn't see that happening. A more realistic outcome, he said, is after a few weeks of the sequester, the economic turmoil will cause enough blowback in Washington to spur lawmakers to pass another stopgap spending bill and find another temporary fix to the sequester.

"The pain felt by private employers and workers will be made loud and clear to members of the House and Senate, and it's interesting how quickly they react when that happens," Bell said.