The Sequester: A Small, Dull Meat Cleaver

It looks like the sequester will go through, at least for a while, before Congress gets their act together (if they ever do).   Republicans refuse to budge on the issue of tax giveaways for the rich (which makes them responsible for any fallout the sequester may bring to the economy), and Democrats are simply not bold enough to do what really needs to be done.  But what exactly is the sequester, and why is it so bad for the economy?

First of all, the sequester consists of across-the-board, inflexible, automatic budget cuts as far as discretionary spending is concerned.  Half of the cuts will come from defense spending, and the other half from non-defense spending.  The size of the cuts (5% overall across the board each year for the next 10 years, 8.2% for defense) may not seem large, but the indiscriminate nature of these cuts won't just cut out the fat, but also bone and muscle as well.  If the doctor tells you that you need to lose weight, you wouldn't chop off one of your hands.  But that's exactly the kind of effect the sequester would have, and it won't be pretty.

Secondly, our economy is still very weak, and cutting too much too soon would likely push our economy back into recession.  The direct effect of these cuts would mean at least 750,000 public sector jobs would be lost this year alone, and the multiplier effect would mean that many private sector jobs would be eliminated as a result, making the total of jobs lost well over 1 million in 2013.  And we need that like we need a hole in the head.

Thirdly, many of the so-called "cuts" are not really cuts at all, but reductions in the growth of spending over time.  Thus, even if the sequester remains in effect for a whole decade, the net effect is that federal spending (and the national debt) will continue to grow significantly over the next decade.  But it would still do significant damage to the economy since these "cuts" are indiscriminate and inflexible.

Finally, although Congress clearly has a problem with spending like drunken sailors (regardless of who is in power), there are better alternatives to the sequester that would not only reduce but eliminate the deficit rather quickly.   The TSAP has repeatedly proposed better ways of balancing the budget and dealing with our massive national debt.  Right now, the deficit is really not our biggest problem, but it still must be dealt with.  And while our ideas will probably not come to fruition in today's Congress, the sequester is still one of the worst possible ways to deal with the deficit and any alternative must be put in place very soon.   For example, simply modifying the sequester to allow the heads of various agencies the flexibility to decide how to make their cuts (as long as the overall amount cut remains the same) would achieve the exact same effect on the deficit, but with far less collateral damage.  And Obama's plan to combine spending cuts with increased revenues (from removing various tax loopholes for the rich and corporations) is better still, though not quite as good as the TSAP's plan.

But it looks like the sequester will go through nonetheless, much to our chagrin.  The Republicans have rejected Obama's last offer for an alternative deficit-reduction plan, and in doing so they have revealed (yet again) that they really only care about the ultra-rich and mega-corporations.   Hopefully Congress will wise up before too much damage is done.

UPDATE:  The sequester has already begun as of noon on March 1.  While most of the impact will not be immediate (it will take at least several weeks to feel it), the pain will be real for those affected.  And millions of Americans will be affected in one way or another eventually.  But the silver lining is that Obama and the Democrats now have the upper hand should a belated deal be made in the days to come.  And the Republicans would get blamed for any fallout should a deal not be made in the near future.

If no deal is possible in the near future, the least-worst choice of all would be for Congress to simply repeal the sequester entirely with no strings attached.  Yes, they can do it if they want to, and at this point it is clearly in America's best interest to do so.  But they probably won't unless a critical mass of Americans credibly threatens to vote every single one of them out of office in 2014.

UPDATE II:  Looks like the sequester is already starting to kill jobs as of the first week of April, one month after the sequester began.  And the much-anticipated furloughs have officially begun.  But remember, the worst is yet to come if the sequester remains in effect.