Automatic Budget Cuts Could Cause 1 Million Layoffs

Think tank warns if lawmakers fail to pass a debt-reduction plan, one million jobs are at risk.

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Hundreds of thousands of Americans could head to the polls in November with fresh pink slips from firms that do business with the federal government, potentially upending key races across the country.

If Congress fails to pass a broad debt-reduction package this year that would reduce the federal debt by $1.2 trillion, around $500 billion in separate cuts to defense and domestic entitlement budgets would go into effect Jan. 1. The impact would force government entities like the Pentagon to cancel contracts, lay off workers and terminate programs, experts of all political stripes agree.

The Bipartisan Policy Center, in a report released Thursday, predicts the result would be a fresh injection of unemployed Americans into the still-staggering U.S. economy.

[Check out our collection of political cartoons on defense spending.]

The center concludes the result of those automatic cuts—which would be done through a process called sequestration—would be 1 million job losses, and that estimate covers only 2013 and 2014.

James Jones, a former national security adviser to President Barack Obama and a retired Marine Corps general, called the notion of the deep automatic cuts "foolish." Some lawmakers and congressional watchers say a debt-reduction deal is possible after Election Day.

But companies that depend on massive government contracts—like defense manufacturing firms and their suppliers—cannot wait that long. Some already are laying off employees.

"The consequences of not doing something now are huge," says Jones.

Dan Glickman, a senior fellow at the Bipartisan Policy Center, says a group of around 30 senators huddled quietly Wednesday on Capitol Hill to begin working on a comprehensive debt-paring package.

For defense contractors and other U.S. firms that can no longer bet on receiving some of the massive government contracts they have in recent years, they will lay off more and more employees as the calendar moves closer to the automatic cuts.

"Sequestration would have a dramatic and adverse impact on small and medium companies. They don't have the cash reserves" that major defense companies like Lockheed Martin and General Dynamics have, says Arnold Punaro, a former executive at SAIC and senior Senate staffer.

For executives of such publicly traded firms, "there is nothing under [existing] SEC laws that you can do but guide down," Punaro says. "Their stock prices will go down. ... The only thing you can do is layoffs. And they're already doing that."

Unless Congress acts before November 6, the yearly business cycle could bring a raft of pink slips just before voters head to the polls.

"Hundreds of thousands of people may get notices two days before Election Day," says Dov Zakheim, a former Pentagon comptroller and Booz Allen Hamilton executive.

Asked by U.S. News & World Report whether that means many of those potentially freshly fired voters would be eager to vote out every incumbent politician on their ballot, Zakheim sternly replied: "You better believe it." 

John T. Bennett covers national security and foreign policy for U.S. News & World Report. You can contact him at jbennett@usnews.com or follow him on Twitter.