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How Did We Get Here?
In August 2011, Congress passed the Budget Control Act of 2011 that agreed to increase the "debt ceiling" to allow the government to borrow additional money. The borrowed money is needed to support government spending programs above collected revenues, i.e. taxes. The Act also formed a Congressional "Super Committee" assigned the task of developing a deficit reduction plan. The targeted deficit reduction was to equal the $1.2 trillion debt increase approved in the Act. The Act was designed such that if the Super Committee was unable to come to agreement, automatic spending cuts to both military and domestic programs, known as Sequestration, would occur on January 2, 2013. That date was then pushed out to March 1 as part of the "Fiscal Cliff" agreement reached on January 3.
Because the deal creating the Super Committee was approved by the House, Senate and President, all should have been fully aware of the Sequestration language. Republicans don't like the military cuts and blame the President, suggesting Sequestration was his idea. Democrats don't like the domestic cuts and have referred to mass layoffs and reductions of crucial services. Some politicians have suggested the Sequestration will be devastating to our economy. In the President's defense, is it bad to use a universally disliked policy, such as Sequestration, as incentive to motivate the Super Committee to come to a deficit reduction agreement?
Looking closer at the cuts, the $1.2 trillion amount is spread over a ten-year period, making the annual cuts $120 billion. Because the fiscal year ends in September, we don't have a full year of cuts for 2013, so the pro-rated amount is $85 billion. But due to the way spending is authorized before it is paid, the Congressional Budget Office (CBO) predicts the actual 2013 cuts will be $44 billion.
How Bad Will It Be?
It seems crazy to throw around numbers such as $85 billion dollars so easily. But with a U.S. economy that is $16 trillion in Gross Domestic Product (GDP), the truth is these are small numbers. The $85 billion is only 0.5% of GDP. When compared to the 2013 Federal budget of $3.6 trillion, $85 billion is 2.4% and the CBO amount of $44 billion is only 1.2%. As important, these "cuts" don't represent a reduction from last year's spending levels. They represent a reduction of budgeted spending increases. Think about that for a second, a 2.4%, $85 billion decrease to a previously scheduled budget increase might devastate our economy? If that is true, then shouldn't we be talking about the payroll tax increase, another part of the aforementioned Fiscal Cliff deal that will burden consumers to the tune of at least $75 billion in 2013. I find it interesting that no one in Congress wants to discuss the economic effects of that policy. Thus, my opinion stands that this amount of spending reductions does not warrant the level of angst suggested by our political leaders.
However, that doesn't mean I think Sequestration is good policy. In fact, it stinks. Why? Well, clearly we have fiscal problems that require a balanced approach of tax increases and spending cuts. The problem with Sequestration is that the cuts are across-the-board. Congress has no opportunity to fine-tune them. All programs, regardless of priority, get cut. It's like trying to fillet a Swordfish with a meat cleaver. In
this respect I agree with both parties that Sequestration is bad policy. But the balanced approach requires spending cuts. Thus, I hope we can retain the cuts, with a bit more precision as to how they are distributed. |
