A blunt sequester better than none

Brookings Institution

Barring an unexpected breakthrough agreement between the Democratic senate and the Republican house, the federal US budget will be subjected to a sequester which will reduce discretionary spending by about $US86 billion in calendar 2013.
That $US86 billion is only a bit more than 10 per cent of the "fiscal cliff” that faced the country at the end of the year. It’s a painful cliff, but not a large one. The American Taxpayer Relief Act resolved most the cliff problem, but the Congressional Budget Office says that the sequester will reduce short-term growth in an already slow economy. On the other hand, no sequester at all would mean an even greater reduction in long-term growth.

The worst feature of the sequester is that it is the wrong way to reduce spending. The cuts are mandated across-the-board in most discretionary spending areas. The good programs will be cut along with the bad. The most hard-hit casualty will be the US Defense Department. It can stand cuts, but they need to be carefully selected. The sequester does not select. The sequester meat-axe slices muscle along with the fat.

It is hard to believe that allegedly smart people could have agreed to such a device. The president and the leaders of both houses signed off on the sequester in the belief that because it was so bad it would force them into a compromise deficit/debt reduction plan despite their philosophic disagreements.

As it seems to be turning out, US representatives’ philosophic disagreements are more precious to them than the health of the nation’s economy. Republicans want to protect tax rates and Democrats want to protect entitlement programs. They would prefer the sequester, admittedly smaller than the tax cliff, to any form of compromise.

The moment of truth is only a week away. Most odds-makers believe the sequester will actually occur. However, the policymakers do have other choices:

1) They could postpone it, in hopes of making a later deal;

2) They could trash the sequester, and sacrifice long-term growth for another short-term fling;

3) They could give the executive departments leeway to make the cuts where best tolerated; or

4) They could live with the sequester for a few weeks or months, and then holler "uncle” and opt for (1) , (2), or (3) above.

This writer believes that the sequester will happen. However, when airport security lines triple, the national parks open later and close earlier, and our military tours abroad are extended, there is a good chance that Congress will begin to rethink the problem, particularly with respect to the DOD. If so, at that point, it is critical that Congress replace a dumb cut with a smart cut of equal value, rather than deferring or repealing the sequester.

Our debt is already high. The CBO sees it going higher rather than stabilising under the most likely budget scenarios over the next 10 years. The president’s budget drives the debt ratio up around 80 per cent in 10 years. That’s one reason why cancellation or deferral of the sequester would be unwise. Over 10 years, the sequester would save well over $1 trillion. Another reason is that it makes no sense to swap short-term faster growth for long-term reduced growth.

If no comprehensive compromise (one with total 10-year reductions of Bowles-Simpson proportions) is in sight, it is better to accept the stupid cuts of the sequester than to postpone deficit/debt reduction plans again. The best plan would be smart cuts. The sequester is a distant second choice, but, clearly, it is better than nothing.

A US congressman for 20 years, Bill Frenzel has specialised in budget issues and tax policy. He was the ranking minority member on the House Budget Committee; advised President Clinton on NAFTA; and advised President Bush on Social Security and tax reform.

This story was first published by The Brookings Institution. Reproduced with permission.

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Weird how Republicans and Democrats would rather score some points than work on sensible bipartisan reform with their massive debt issues.
Bit like contributions from our various regulars who see the market moves as a chance to say "told you so", as regards to whether they are bulls or bears.
Gosh, its not a contest for heavens sake. (A blunt sequester better than none, February 27)
With the amount of the debt the US it is a machete that is required (A blunt sequester better than none, February 27).
The US can not simply go on the way it has been spending and borrowing beyond its means
The US needs to slash military spending, raise taxes and be ready to pay a very harsh price for excessive waste on wars they could not afford and for initiating the GFC (A blunt sequester better than none, February 28). Major taxation reforms are required as outlined by Warren Buffett and a much needed investment pipeline is required to develop ageing or new Infrastructure. The working poor need the opportunity to utilise Public Transport, which is virtually non-existent. Over the coming decade, initiate key Nation building programs not unlike those seen under Roosevelt's New Deal. I'm presently living in the US and can see that nothing has changed, just more poor people who are increasingly desperate and afraid. Most are still living on award wages, have little to no social security protection, a University Education is beyond almost all, even State/County tech colleges have enormous queues such is the demand to become re-skilled. Health Insurance costs are well beyond the greater 90% and even then they won't cover all cost if and when the time comes. There is no middle class. So again the working poor 80-90% are turning to juggling multiple credit cards to try and make ends meet. Its utterly tragic! There are people begging for food (not money) at traffic lights, tent cities popping up in neighbourhood parks because the rents are so obscenely expensive as so many have lost their homes and demand so high. These properties have been swallowed up on mass by those with money for peanuts and are being rented at more than the cost of present mortgage costs, so a great investment for those with money that can get a bank loan or 200. The tech sector has most of its money in the Bahamas like most wealthy Americans do. So unless Buffett's taxation reforms are implemented and spending slashed the US will be Bankrupt and I dare not wish to think about that possibility. Oh bye the way - I'm in Silicon Valley where things have apparently never been better. So is that pretty heavy dude?
"The sequester meat axe strikes
And, having struck, moves on;
Nor all thy piety nor wit
Shall call it back to cancel half a slice,
Nor all thy tears wash out a single purge."
After Omar (A blunt sequester better than none, February 28)
You can tell it's partisan when you read this bald statement with no supporting references and no reference to how a fiat currency is actually able to be managed by a sovereign currency issuer:
"On the other hand, no sequester at all would mean an even greater reduction in long-term growth. (A blunt sequester better than none, February 28)"
The world didn't end when the official price of gold was increased to allow a form of "money printing" after the Great Depression, it didn't end when the gold standard was dropped and it didn't end when Bretton Woods was dropped.
It is critical to understand the difference btween the sovereign issuer of a free floating fiat currency that borrows its own currency and a sovereign nation which uses someone else's currency ie members of the Euro, or who pegs to and borrows in another sovereign's currency eg Argentina a couple of decades ago.
Even the RBA has recently acknowledged that it has plenty of Australian dollars because "it prints them".