Many Americans find it difficult to believe Congress would send them over the “fiscal cliff,” that metaphorical spot where expiring Bush-era tax cuts meet sequestration budget cuts come Jan. 1, 2013.
But the cliff already has had an effect on jobs and economic growth in Iowa, and will have considerably more in January, when the first phase of federal budget sequestration — set up in the Budget Control Act of 2011 — kicks in unless Congress acts to prevent it.
The inability to rule out the fiscal cliff has constrained capital spending and promoted both work force reductions and more conservative hiring at a number of companies nationwide, even with the fiscal cliff in January more than two months away.
Cedar Rapids-based Rockwell Collins, which gets about half its nearly $5 billion in revenue from defense contracts, can’t say exactly how many jobs it’s had to eliminated in recent months due to the fiscal cliff.
Kelly Ortberg, Rockwell Collins’s newly named president, said recently that the company’s done less hiring and more head count reductions because the fiscal cliff and its 10 percent across-the-board cuts are a possibility.
Rockwell Collins has been through at least six rounds of job cuts, affecting hundreds in Cedar Rapids and more at locations scattered across the globe.
But the amount of the budget cuts is only part of the problem, Ortberg said.
Federal agency administrators aren’t expected to have immediate answers on where to cut spending immediately on Jan. 2, he said, so the government probably will delay many contract awards that could eventually go forward while spending plans are reviewed.
“While a 10 to 15 percent budget cut is substantial, it’s the confusion in and around sequestration that’s the thing,” Ortberg said.
Earnings guidance released Sept. 21 by Rockwell Collins indicated even more cutbacks are likely. The company expects revenues in its Government Systems business to fall 10 percent in fiscal 2013 — about half the decline due to sequestration cuts.
Rockwell Collins employs close to 9,000 in the Corridor. Its business relies about half on defense contracts, making it like most Iowa companies that handle such contracts, at best a hybrid defense contractor.
Some observers say Iowa will see less impact if the nation plunges over the fiscal cliff than some states because it doesn’t rely as heavily on the government.
“We don’t have a lot of federal installations in Iowa, and it’s those places that are going to get hit hardest if we have sequestration,” said Peter Orazem, Iowa State University professor of labor economics and a Ames City Council member.
Ames likely would be affected more than most Iowa cities. It’s home to the U.S. Department of Agriculture’s National Animal Disease Center and one of the USDA’s two National Veterinary Services Laboratories.
Orazem was intrigued by one analysis from the Washington, D.C.-based Center for Security Policy that strongly suggests that the effect on Cedar Rapids would potentially be the greatest of any city in the state.
“The interesting thing is, in terms of the counties, is that you end up losing $169 million in Linn County, and it is almost 2 percent of the total production in Linn County,” Orazem said.
Statewide, only about 0.35 percent of production would be affected by sequestration, suggested the Center for Security Policy report.
Orazem said Iowa businesses could nevertheless be hurt by spillover effects from job and spending cuts at federal facilities in Omaha, or at the Rock Island Arsenal in the Quad Cities.
At least 266 job cuts would be spread across the state in in programs such as Head Start and special education in public schools, which rely on federal funding, according to a report from the U.S. Senate Appropriations Committee Majority Staff provided by U.S. Sen. Tom Harkin.
In reality, however, it’s unclear how the cuts would be meted out by the federal and state governments. The Obama administration hasn’t spelled it out, and the reality is it would be very challenging to implement without significantly affecting government services.
A report issued Sept. 21 by the Office of Management and Budget said sequestration cuts would be “deeply destructive to national security, domestic investments and core functions.”
Most defense programs would be cut 9.4 percent, while domestic programs would take a 8.2 percent hit.
“We’re all very interwoven in this, and the impact would be broad,” said John Solow, professor of economics at the University of Iowa’s Henry Tippie College of Business.
Solow said thousands of UI students, for example, receive federal scholarship assistance. The cut of $140 million in financial assistance from the Office of Federal Student Aid likely would cause some students to delay their education, or to cut back discretionary spending because they couldn’t rely on student aid for financial support.
That would likely ripple out through the Iowa City community, Solow said, affecting businesses that rely on student spending in things such as apartment rents, bar tabs and convenience-store credit card swipes.
Economists have very little good to say about the wisdom of even approaching the fiscal cliff, let alone letting the nation fall over it.
The Congressonal Budget Office says the increases in federal taxes and reductions in federal spending would total almost $500 billion in 2013, the largest amount of deficit reduction in one year that as occurred as a share of gross domestic product since 1969. As a result, the deficit would fall 0.5 percent from the fourth quarter of 2012 to the fourth quarter of 2013.
Solow pointed out there’s a serious risk of driving the nation’s economy back into recession, which could worsen everything from unemployment and home sales to manufacturing and services. Only this time, the cuts in government likely would be larger.
“We would get a tax increase, but not the tax increases President Obama would want,” Solow said. “They would get budget cuts, but not the budget cuts Mitt Romney wants. He doesn’t want to cut the defense budget.”
“Across the board,” Solow said, “it ends up not being very rational.”