Image
© AP Photo/Julie JacobsonPersonal income posted its biggest monthly drop in 20 years in January, mainly a result of Washington's austerity fever.
As you have probably heard, today is Sequester Day, when the Austerity Badger sneaks into America and sets our money on fire. In truth, austerity is here already.

Personal income plunged 3.6 percent in January, the Bureau of Economic Analysis reported, the biggest drop in 20 years. The decline was driven by a couple of unusual one-time effects, according to the BEA. Both are direct results of Washington's suicidal obsession with budget deficits at a time of persistent economic weakness.

The biggest of these was a reversal of a surge in dividend income in December, as companies rushed to pay stock holders dividends before the "fiscal cliff" hiked dividend tax rates in the New Year. That amounted to about 2.6 percentage points of the total income drop, according to Capital Economics.

The second hit to income was the reinstatement of the federal payroll tax after a long holiday. The 2 percent increase in Social Security withholding cut nearly $127 billion from income in January, according to the BEA, Goldman Sachs economists pointed out (h/t Quartz's Matt Phillips). The bump and decline in dividend income is a wash. The payroll-tax cut is going to be harder to shake off, leaving Americans with smaller paychecks for the rest of the year.

The higher payroll tax, along with the sequester budget cuts that will start to kick in on Friday, and other lingering effects of the "fiscal cliff" that loomed at the start of the year, will cut economic growth this year by 1.5 percent. But economic growth has already been hampered for the past two years by the government's biggest spending cutback since the end of the Vietnam war, as the New York Times pointed out earlier this week. We entered the age of austerity long before the sequester.

And still the austerity fever is unbroken. Though President Obama on Friday warned of the dire economic effect of the sequester's "dumb and arbitrary" spending cuts, his solution is a broader deficit-reduction package, a "grand bargain" of tax hikes and spending cuts. More austerity, in other words. Obama's Republican opposition wants a different sort of deficit-cutting package, but ultimately all seem to agree that some amount of austerity is necessary.

That's a big reason why the economy continues to stumble along meekly, growing just 0.1 percent in the fourth quarter of 2012 and likely to be perilously slow in 2013. Ironically, as Federal Reserve Chairman Ben Bernanke pointed out earlier this week, a slower economy means it will be harder to shrink the deficit. Which means we'll have more austerity fever. Rinse, repeat, watch your paycheck shrink.

The Sequester's Winners:

Wall Street: The sequester cuts would slash funding for financial regulation. That means some Wall Street reforms that are the ire of big banks could be slowed down, The Huffington Post's Mark Gongloff writes.

Immigration Reform Opponents: If the sequester takes effect, ramping up border security will be next to impossible because the Department of Homeland Security will have to cut many of its agents. This is bad news for immigration reform, as conservative supporters of reform have said that they would only sign on to legislation if it includes provisions to beef up security at the border, according to the Christian Science Monitor.

Gun Control Opponents: The sequester's across-the-board spending cuts would slash funding to the gun background check system, FBI director Robert

America's Foreign Enemies: A variety of national security programs, including counterterrorism operations, foreign surveillance and counterintelligence would face cuts if the sequester takes effect, according to ABC News.

Tofu Makers: We may all be forced to go vegetarian if the sequester takes effect. That's because the looming budget cuts would slash funding for meat and poultry inspectors, potentially shutting down the meat industry for two weeks, Agriculture Secretary Tom Vilsack warned. That could be very good news for tofu makers.

Companies Violating Environmental Standards: The Environmental Protection Agency would have to cut 1,000 of its inspectors if the sequester takes effect, according to ABC News. That means there will be fewer people working to ensure that businesses are complying with environmental standards.

Companies Making Unsafe Food: If the sequester takes effect, the Food and Drug Administration may have to cut 2,100 of its inspections, according to the International Business Times. That's not great news for those of us concerned about food borne illness.

Criminals: Law enforcement agencies, including the FBI, may have to get rid of more than 1,000 agents if the sequester takes effect, according to the International Business Times. That means it could get a lot easier to commit a crime.