UMass Donahue Institute completes first-in-the-nation economic study of sequester

By Cecilia Prado

Courtesy of Wikimedia Commons
Courtesy of Wikimedia Commons

The University of Massachusetts Donahue Institute (UMDI) performed its first ever study on the economic effects that federal spending cuts from 2013 and 2014 have had on the economy of Massachusetts. UMDI was hired by the Massachusetts Executive Office for Administration and Finance (ANF), Mass Development and the Massachusetts Life Sciences Center requested by the Sequestration Task Force in order to investigate which areas are affected by the budget sequestration.

The study was conducted by the Donahue Institute’s Economic and Public Policy Research group (EPPR). It consisted of a meticulous and highly customized analysis of the immediate fund reductions caused by sequestration and an economic impact examination that specified the direct effects of the cuts to industry activity.

The EPPR measured the firsthand and overall impacts that the budget cuts had during the federal fiscal years 2013 and 2014 within the areas of employment, labor income, value added, business output and state tax revenue. Along with this, the study illustrates a wide range of scenarios in order to demonstrate some of the inconsistency about the decrease in funding and related activity.

Although every state will be unfavorably impacted by the cuts, the results of the study suggested that the state of Massachusetts will suffer more than others. According to Daniel Hodge, the director of Economic and Public Policy Research, there is an enormous number of ways that Federal expenditures reach Massachusetts. This means that although the sequestration cuts did not result in massive direct layoffs, the aggregated impact when combined across all programs adds up to a fairly large and significant drag to the economy.

Over the years, universities and high tech companies in the state have had excessive success in obtaining contracts from federal agencies that are now immediately affected by the budget sequestration. Also, federal grants given to the state’s universities and high tech companies play a substantial role in the Massachusetts innovation economy. Reducing the amount of fund provided by the grants jeopardizes the likelihood for future economic growth.

The full-range of federal spending cuts that will affect Massachusetts are estimated to total over $1.3 billion during the federal fiscal year 2013. The economic impacts reflect losses and economic growth on jobs not added.

“We think that our estimate of impact is consistent with the state’s slower economic growth over the middle part of the year and that anything over 10,000 jobs is a significant impact for Massachusetts,” said Hodge.  However, the state continues to see private sector job growth so it had not overwhelmed the economy.

Hodge stated that it is important to keep in mind that the full effects of the spending cuts are not being felt immediately for a wide range of reasons, but the longer we experience reduced federal spending on key areas like the National Institute of Health (NIH), the more it threatens key industry sectors in Massachusetts. One example of this is the life sciences, which relies heavily on basic research. In addition, Hodge also mentioned that the recent Congressional budget agreement does not solve the longer term (2016-2021) sequestration cuts.

Cecilia Prado is a Collegian correspondent and can be reached at [email protected]