Sesquestration and its discontents

Absent a dramatic turnabout in events, sequestration begins to kick in on March 1. What once was thought of as the dumbest of all dumb ideas now has the real possibility of coming to fruition and its impact on the economy will not be good since it is essentially an austerity program. But even without sequestration, US economic policy is already one of austerity, raising doubts about the medium and longer term prospects for American economic growth.

Let’s first be clear about what sequestration is. Back in 2011 when Obama and the House Republicans were at logger heads about raising the debt limit, the core of the disagreement then was insistence by the Republicans that they would not raise the debt ceiling unless there was a significant effort to cut future US spending. Obama and Speaker Boehner were close to a grand bargain to cut several trillion dollars in future spending, but the deal was scuttled by GOP refusal to go along with some tax increases.

In the end, the deal to raise the debt ceiling was postponed to the end of last year–the Fiscal Cliff. But part of the 2011 deal was also the creation of the mother of all poison pills--sequestration. The idea behind sequestration was that if the Republicans and Democrats (Obama) could not agree on future spending cuts there would be automatic cuts to military and discretionary spending so severe that the mere threat of these cuts would force each side to reach a deal. By self-description both sides then described the sequestration cuts as stupid or unwise. Sequestration was supposed to occur at the end of last December as part of the Fiscal Cliff but it was kicked down the road two months to allow time to deal. You could have practically predicted what would happen–the day of reckoning is again upon us.

It is looking less and less likely a deal will occur by the end of the month. Both sides are yelling and accusing the other of bad faith and being unwilling to compromise.

But the truth be told, both sides are responsible but in very different ways. The Republicans are responsible for the problem by their refusal to consider any tax increases to go along with the cuts. Remember this is the same party that when asked of its presidential candidates two years ago would they go along with one dollar of tax increases for nine dollars in spending cuts, none of the contenders said yes. The GOP also seems to hold to a mythic fairyland belief that all taxes are bad, that the only way to help the economy is by spending less, that government is evil, or that it crowds out the economy. They essentially lack an economic plan and instead simply have failed dogma to which they cling. No surprise here. For the most part Congress is devoid of members who know much about economics. One of my favorite books is Paul Gary Wyckoff’s Policy and Evidence in a Partisan Age (2009). He highlights the lack of understanding in economics among members in Congress, finding few with any formal training and literacy in this field. He also points out that often what elected officials use as evidence for their ideas are anecdotal stories—the least reliable types of evidence there is. Few seem to grasp statistics, regression, or correlations and what they mean. Effectively, Congress in general and the GOP specifically seem largely ignorant about basic economics.

But Obama too is at fault. His fault is that he has already conceded the battle. While he talks a good game about jobs he has largely embraced the austerity agenda. He is largely committed to spending cuts and seems really to have given up on any major efforts to revitalize the economy and jobs. We have produced several million new jobs in his first four years but the recovery is still tepid and it will take years if at all to make up the lost ground from the last few years. Obamanomics has not been terrific.

But even if sequestration is avoided, there will be cuts. The Saturday February 23, 2013 New York Times reports that states are worried about the impact of sequestration on their economies and budgets, but equally worried about the cuts that will happen in the alternative to sequestration. In either case, we are headed into a longer term austerity plan. A plan that really does not produce jobs, future investments, or which tries to grow the economy out of its budget problems. It is austerity similar to what many European countries are doing, and the results for them are not good.

But the other tragedy of sequestration beyond the foolish commitment to austerity and a blind faith in thinking that cutting federal spending and investments are the gateway to economic Nirvana is this idea that somehow gimmicks can solve budget problems. Sequestration needs to be thrown into the dustbin of failed ideas that include PPBS, the Balanced Budget Amendment, the Gramm-Rudman Act of 1985, and line-item vetoes. The history of budgeting in America is told of special commissions (Simpson-Bowles) and gimmicks yet none work simply because they are poor substitutes for political will and reasoned and informed judgment.

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    David Schultz's picture
    David Schultz

    David Schultz is a professor in the School of Business at Hamline University.