ANALYSIS: “Sequestration” May Shock Hawaii Economy

By Nate Gaddis

As the annoyingly enthusiastic, spandex-clad stars of TV fitness would explain it, there are many ways to lose weight. Most of them involve lots of bouncing.

One option they don’t mention of course, is that you could simply cut off a finger.

The latter, more painful approach is a nice illustration of what will happen if Congress fails to reach a budget compromise by the end of February.

“Sequestration” refers to the $85 billion in federal budget cuts set to kick in on the first of March, should no agreement be reached. The cuts (to be split between domestic and defense spending) were designed to be so harsh, that lawmakers wouldn’t dare screw this up.

Since Democrats and Republicans appear ready to drive us over the ledge, a la “Thelma and Louise,” it’s worth asking how far the drop will be.

First, let’s cover what’s not affected by the sudden cuts.

Social Security, Medicaid, refundable tax credits, and several low-income programs will be spared. Student Pell Grants are exempt this year, though the most common form of student loans will see small fee increases (less than 1%).

Kaneohe-based Marines will be among the active military members not facing paycuts. Image courtesy US Defense Department.

Active military personnel won’t face pay cuts or layoffs, and programs administered by the Department of Veteran’s Affairs are exempt. Mail deliveries shouldn’t be impacted, as postal workers aren’t included in the cuts.

Members of Congress will also be spared, in case you were wondering.

But for those falling prey to the budget axe, the cuts will be deep.

The State Department of Budget and Finance has estimated that $32 million in federal  funding would be sapped from various state departments, with the largest share ($12 million) coming from the DOE.

Medicare is partly protected, with cuts limited by law to 2%. That seems mild, but in 2009 alone that would have meant over $10 million in reimbursements being sucked out of our health care system. The damage today would likely be much greater.

A slew of federal agencies will face cuts here, with over 4,000 non-defense employees potentially impacted. Those agencies range from the IRS and FBI to the FAA (air traffic controllers, for instance.) But the real lion’s share of the hurt will be absorbed by the US military.

Of all the 50 US states, Hawaii is by far the most military-dependent. According to the Pew Center for the States, 14.6% of our economy is made up of military-related activity.

Due to impending budget cuts, the US Navy has already cut the number of aircraft carriers on far-away deployments.

According to documents obtained by USA Today, the Army expects its cuts in Hawaii to hit at least $287 million. The Navy is reportedly estimating $110 million in losses here, while the Air Force expects to lose $35.4 million for Hawaii-based operations.

Those figures likely include the recently announced furloughs for 19,000 civilian defense workers here in the islands. The pay cuts are part of a larger Department of Defense plan impacting 800,000 of its civilian staff across the globe.

Locally, that contributes to military cuts in excess of $432 million. Combining that with previously released figures on state programs and Medicare brings the damage up to around $475 million this year. Given that many federal agencies haven’t yet released their estimated cuts, that figure could certainly climb.

The DOD furloughs could reduce income for the average civilian employee by $5,625. However, that figure is may be misleading when applied to Hawaii, as cost-of-living adjustments and other factors could mean the real impact here is quite different (possibly higher).

Whatever the exact damage to DOD employee pay here, one thing is clear. Having 19,000 residents suddenly deprived of thousands of dollars will have a huge impact locally. The sudden loss of income will be a nasty kick-in-the-teeth for our economy, with a ripple effect that impacts both businesses and state tax revenues.

Will all of this be enough to throw Hawaii back into a recession? That depends. Assuming forecasts by the state Department of Business, Economic Development and Tourism are correct, Hawaii’s GDP will grow by 2.6% this year. The Honolulu Star Advertiser recently reported that DBET’s estimate already factors in the possible budget cuts, which are expected to slash 0.8% from state GDP in 2013.

Although the cuts don’t appear likely to cause a recession here this year, they still represent a gaping wound. Had they happened in a more stagnant climate for commerce (like the below-zero growth experienced in 2011), the budget reductions would have dragged our economy firmly into the red.

The US economy is projected to grow 1.9% this year. But Federal budget cuts could sap half a% out of the economy in total.

None of these estimates take into account the backlash Hawaii could face when these cuts hit the US mainland. A recently released survey of economists by the Federal Reserve predicted the US economy would grow by 1.9% this year.

That meager gain should technically be enough to keep the nation from tipping into a recession, even after $85 billion in cuts (assuming congress screws up). But sudden shocks like these can have unpredictable effects on consumer and business confidence.

Should lawmakers really drive us off a cliff, we probably wouldn’t really “eat it” till around the end of March. But it would take a lot longer than that to find out just how far we’d fallen.

Hopefully they’ll stop screaming at each other long enough to hit the brakes.

A full breakdown of national-level budget cuts is available here.