Sequestration

It’s a big word for the $1.2 trillion in automatic spending cuts over 10 years that Congress set up in the summer of 2012 when it couldn’t agree on how to achieve deficit reduction in return for raising the debt ceiling. So lawmakers set up automatic cuts and automatic tax increases to take effect if they couldn’t agree before the end of 2012. In other words, it’s the spending-cuts half of the fiscal cliff that remains after the tax-increases half was solved on January 1, 2013.

Federal workers will take cuts in pay, essential services to poor people will be reduced or eliminated, safety and law enforcement will be reduced, and small business loans will be cut.

The reduction in federal spending across the economy, and the reduction in spending power from the furloughing of Defense Department and other federal workers, will have a devastating effect on the economic recovery. A survey of money managers says they expect the Dow to drop by 5% if sequestration happens on March 1. But will it?

With little more than two weeks to go, the two parties agree it’s critical to avoid the automatic cuts, but they are far apart on how to accomplish that. Republicans insist that no more tax increases be part of any deal; Democrats want a 30% minimum tax rate on incomes over $1 million and the closing of corporate tax loopholes to be part of any cuts in spending. Stay tuned to see whether Washington can work out a compromise.

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