The worst policy idea in Washington: the sequester

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IMAG0109

In 2011, during the (dreadful) debt ceiling negotiations, the White House and congressional republicans reached an odd agreement. In exchange of not destroying the full faith and credit of the United States and blowing up the world economy, Congress created a super committee that was going to devise a deficit reduction plan. To force the committee to reach some sort of deal, the agreement included a poison pill: if there was no deal, the legislation would trigger a fiscal doomsday machine with brutal, irrational, across the board spending cuts that should have been unacceptable to all parties, starting January 2nd, 2013. The sequester.

 

Congress being Congress, the super committee met, argued and discussed, but never managed to reach an agreement. Republicans wanted a deal that was all budget cuts, Democrats wanted some revenue, negotiations went nowhere fast, and both parties decided to settle the conflict the old fashioned way, in an US presidential election. That was the theory, at least; as usual, Congress ended in a stalemate in December, postponing the cuts until March 1st - that is, this Friday. And this time it seems that the sequester will go into effect, in full force.

The big problem, in this case, is that the sequester is a terrible policy idea. Congress tried to make them the automatic cuts really unpalatable, and for once they made a really good job at it. The sequester essentially is more that one trillion dollars in budget cuts in ten years using the bluntest instrument possible: cutting a fixed percentage of spending across government, without giving any consideration on what to preserve or how.

This is bad for two reasons. Although the sequester excludes several key anti-poverty program and entitlements (SNAP, Medicaid and Social Security are not cut, for instance) and half of the cuts fall on the (bloated) defense budget,  a significant portion of the cuts do fall on low income children and families. To be more specific, in 2013 we would see cuts on programs like WIC, emergency unemployment benefits, community health centers or the social services block grant. The sequester will also bring cuts to education funding, work-study jobs, Head Start, child care or even nutrition assistance for seniors. The White House has released a detailed breakdown of the effects of the sequester in Connecticut, and the numbers are pretty grim, even with SNAP or Medicaid excluded.

Besides the specifics, the spending cuts coming from the sequester will create a substantial drag on the economy. Unemployment will go up; Stephen Fuller from George Mason University has estimated that up to 2.14 million jobs could be lost. Other analysts have produced lower job lost estimates, but the impact would be substantial.

The combined fiscal tightening will also slow down the economy. The Congressional Budget Office has estimated that the sequester alone will reduce GDP growth by 0.6%, on top of the 0.9% drag derived from the rest of deficit reduction in the public sector and the payroll tax increase.

To put it mildly, slashing Federal spending at random in the midst of a very slow, tentative economic recovery is a stupid idea. The fact that those cuts come from a specially convoluted budget agreement that was never supposed to take place in the first place makes it even worse. The sequester is, like the debt ceiling, a debt crisis that should have never happened; it is pretty astounding that Congress is actively choosing not to reverse an exceptionally bad policy like this, but that is what we are about to see.

There are two ways out of this mess. Even acknowledging the need for deficit reduction (a worthy goal on the medium term, but not something that should be a priority right now) the best things Congress could do is just get rid of the budget cuts right now, and move budget discussions further down the road. If Congress wanted to do deficit reduction right now, they should replace the sequester with a balanced mix of additional revenue and more targeted, less arbitrary spending cuts. The defense budget probably needs to be trimmed, for instance; but cuts to vital services (from the FAA to the FBI) does not. Offsetting those cuts with new revenue closing tax loopholes and inefficient exemptions would greatly decrease the adverse macroeconomic effects of the sequester while still improving the fiscal situation (that, we insist, it is not as dire as some say it is) in the long term.

The roadblock, of course, is the Republican House majority, who oppose both ideas and prefer the sequester to either idea, or a budget deal with no new revenue whatsoever. Not that this is surprising, really, but it is still important to keep in mind.

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