Sequestration Blues

For those of you who are just now learning of the recent federal budget cuts, you’re excused for thinking that the cuts must be of such a size and impact to completely stop the workings of the government. The press has been relentless (I guess it’s otherwise a slow news week) in its coverage of the so-called sequestration, a series of across-the-board federal budget cuts split evenly between defense and discretionary spending as part of the 2011 debt-ceiling deal. The cuts, which took effect March 1, will impact an estimated $85 billion.

That seems like a lot until you remember that the 2013 federal budget contains over $3.8 trillion of requested spending. The sequester spending, then, amounts to less than 2.5% of the federal budget, hardly the plague of frogs that some in the press would lead us to believe. If we can’t find a mere 2.5% to cut now without such histrionics from partisans, prospects for deeper cuts later look bleak indeed.

Here are some points to bear in mind as you work through the deluge of news items on the sequester:

1. All government is a blunt instrument: Type into Google News “blunt instrument sequester” and prepare to be amazed by the variety and stridency of folks who say that across-the-board spending cuts are a “blunt instrument,” meaning they impact all programs regardless of their efficiency or effectiveness. I find this line of argument spurious. Government programs, by their very nature, are blunt instruments. For years, government agencies have been funded in the very same manner – with across-the-board spending rises, usually tied to some notion of inflation. Of course, the folks complaining now about blunt instruments and “evidence-based” budgeting have been conspicuously silent about the budget practices that bestowed funding on programs without evidence of their needing it.

2. Congress is dysfunctional: Ah, yes…and water is wet. What’s your point? We’re told by the press that it’s the inability of those in Congress to compromise that is the core problem. For those of us who feel that too much spending is the problem, this seems like a dodge. Some folks even point to the high numbers of newbies in Congress – there’s been a nearly 50% turnover in the last four years – as a reason for the lack of compromise, as the newcomers are allegedly more rigid in their ideology. But consider this – the Senate has not produced a budget blueprint in almost three years, and for all the talk about a “balanced” approach, the Obama administration has not really suggested any hard numbers for prospective cuts, this despite getting the tax increases it so badly desired. On the issue of spending, I do think that both parties are aligned with their constituents’ views, which is to say, maybe the “dysfunction” is symptomatic of a larger problem with the body politic.

3. Entitlements are the problem, not discretionary spending: This is probably the only argument I’ve heard to date against the sequester that actually holds water. It is true, the area of spending that keeps blowing holes in the federal budget is entitlement programs, especially healthcare. So why cut discretionary spending if it’s not the problem? My response would be that, after decades of escalating expenditures, I’m hardly going to criticize the rare instance when Washington decides to cut spending. It is far from perfect, and it does not really target the areas creating the fiscal problem, but better this than nothing. Besides, if we can’t control the entitlement spending fairly soon – and if we should enter into an era with higher interest rates – Americans will likely experience a sequester-like event every year, where tens of billions of dollars will have to be cut in order to free up money to pay debt interest and the increasingly large piece of the pie that entitlements take. Might as well go ahead and get used to it.

4. Sequestration will hurt the economy: At what point is the patient healthy enough to leave the intensive care unit? It is estimated that upwards to 0.6 percentage points can subtracted from net GDP due to the sequester. It’s a sexy thing to talk about; people pay attention when a news report can deliver such hard data points (whether it’s true is anyone’s guess). Not so sexy is to consider is the “credit card” effect that will come to impact the budget as interest rates rise in the future. For instance, for every dollar of deficit spending we engage in today, how much will that dollar “really” cost, once interest is figured in? How much of a drag on economic growth is a $17 trillion debt? When considering budget cuts vis-à-vis the economy, it’s the old story – how much do we burden future generations in order to live large today?