And The Sequester Goes To……The American People

Sequester this, sequester that. This is what has been the storyline that has consumed every news outlet since the start of 2013. But even with the constant bombardment of stories related to every aspect of the dreaded sequestration cuts, do you really know what they are exactly? Through this post I hope to answer any questions you have about the cuts, which officially took effect on last Friday, March 1st at midnight.
What Is Sequestration?
obamaquesterIt’s a series of automatic, across-the-board cuts to government agencies, totaling $1.2 trillion over 10 years. The cuts would be split 50-50 between defense and domestic discretionary spending.
It’s all part of attempts to get a handle on the growth of the U.S. national debt, which exploded upward when the 2007 recession hit and now stands at more than $16 trillion. The sequester has been coming for more than a year, with Congress pushing it back to March 1 as part of the fiscal cliff deal at the end of the last session.
How Did We Get to This Point (And Why Didn’t Someone Stop It)
It started with the 2011 standoff over the U.S. debt ceiling, when Republicans in Congress demanded spending cuts in exchange for giving the Obama administration the needed legal headroom to pay the federal government’s obligations to its bondholders. In the end, Congress and the administration agreed to more than $2 trillion in cuts. About $1 trillion of that was laid out in the debt-ceiling bill and the rest imposed through sequestration, a kind of fiscal doomsday device that Congress would have to disarm by coming up with an equal amount of spending reductions elsewhere.
The plan was that a special congressional panel, dubbed the “super committee,” would find a less painful way to cut spending. It failed in November 2011. That left federal agencies facing harsh cuts that no one wanted.
As former Defense Secretary Leon Panetta so eloquently put it during a speech at Georgetown University late last year, “for those of you who have ever seen ‘Blazing Saddles,’ it is the scene of the sheriff putting the gun to his head in order to establish law and order. That is sequestration.”
Where will the cuts fall?
Obama sequesterMore than $500 billion will be cut from the Defense Department and other national security agencies, with the rest cut on the domestic side (i.e. national parks, federal courts, the FBI, food inspections and housing aid). While the Pentagon has laid out plans ranging from furloughs of hundreds of thousands of civilian workers to combat readiness training and weapons maintenance, the White House budget office hasn’t specified which domestic agencies would take the biggest hits.
Where Do We Go From Here?
Congress put off the sequester until March 1 as part of the last-minute fiscal cliff deal on New Year’s Day. Without that agreement, economists warned that the one-two punch of sequestration and the expiration of the 2001 and 2003 Bush tax cuts could have thrown a still-struggling U.S. economy into reverse. The Commerce Department said a large cut in federal spending, primarily on defense, contributed to the 0.1% decrease in gross domestic product seen in the last quarter of 2012. Last week, Obama urged Congress to pass a short-term deal that puts off the cuts, allowing some breathing room for a long-term deficit reduction plan. But the President said any deal should include more revenue from ending some tax break, a stance that inflamed Republicans who already had to swallow a tax increase for top earners in the fiscal cliff deal at the start of 2013. So as of now, we are no where, with the cuts looming over everyone’s head (since we will not really feel the true effects for a few months).
The History of Unintended Consequences from Government Actions (or Inaction):
  • President Franklin D. Roosevelt, after a solid re-election victory in 1936, believed that the Great Depression was winding down. Unemployment was declining and economic activity was coming back. Roosevelt and Congress believed it was time to cut free-flowing government spending and raise taxes. The Federal Reserve tightened its financial reins. But the fragile economy couldn’t withstand the blows. The Depression roared back, lasting until the 1940s when U.S. involvement in World War II finally revived the economy.
  • President Ronald Reagan’s ambitious 1986 overhaul of the tax code simplified taxes and closed many loopholes, including repealing the popular tax deduction for credit-card interest. Then people started borrowing heavily against fast-rising equity in their homes; that interest still was deductible. But the practice eventually helped put millions of homeowners under water on their mortgages when the housing bubble burst, contributing to the 2007-2009 recession.
  • The Fed has kept short-term interest rates unusually low and printed money to keep downward pressure on longer-term rates, easing borrowing for businesses and individuals. Yet retirees and other savers are earning near-zero interest on bonds and savings accounts, and many investors are jumping into riskier transactions in search of higher returns. Fed Chairman Ben Bernanke and many mainstream economists argue that the Fed’s stimulus policies have helped the housing and financial sectors recover and kept the downturn from getting worse. One leading Fed critic Sen. Bob Corker, R-Tenn., accused Bernanke at a hearing last week of “throwing seniors under the bus” by driving down interest rates on their savings to almost nothing.
  • The tax cuts of 2001 and 2003 were first proposed by Texas Gov. George W. Bush as he campaigned for president in 2000. At the time, the economy was enjoying rare multi-year budget surpluses and government economists were predicting surpluses well into the future. Bush told cheering audiences his tax cuts would return to taxpayers “what is rightfully yours.” Those cuts long have outlived the surpluses, which vanished in Bush’s first year in office. Deficits returned with a vengeance and have grown ever since. But most of them remain today, trimmed only slightly by the New Year’s deal that ended Bush’s tax breaks for households making over $450,000 a year. Economists view those tax cuts as one of the biggest drains on the Treasury, and a major contributor to the spiraling government debt.
You’re Friend in Time,
TJ Lonergan
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