StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Cancelling Sequester May/Should Be The Only Acceptable Option

11 Feb 2013
Posted by Stan Collender

Anyone involved in, observing or analyzing the federal budget knows by now that the sequester -- the across-the-board spending cuts that were triggered when the anything-but-super committee failed to agree on a deficit reduction plan -- was supposed to be so bad that Democrats and Republicans alike would do everything possible to avoid it. That was the theory, anyway.

The problem is that it hasn't worked out as expected. Rather than be the worst-possible alternative, it turns out that the sequester is actually the best for most representatives and senators compared to the tax increases and Medicare and Medicaid reductions that one side or the other (but not both) are saying they prefer.

That's not to say that the sequester is anyone's first choice because it clearly isn't. But it's just as clearly become everyone's second choice compared to every other alternative way to reducing the deficit.

But what if the question were different? What if instead of the sequester vs a tax increase or entitlement reduction, the choice was between a sequester and no sequester?

That's the as-yet largely unspoken option: Instead of the $85 billion in across-the- board spending reductions, vs everything else, what if it was the sequester vs no sequester? The deficit will be $85 billion higher than it otherwise would be, but no one's taxes will be raised, military and domestic spending won't be cut and Medicare and Medicaid won't be touched. 

Not only would this be politically feasible, it also would be the right fiscal policy at this moment. With businesses and consumers not spending, trade not helping and state and local governments still cutting back, it makes no economic sense right now for the federal government to be reducing its contribution to GDP by cutting spending.

The good news is that Republicans and Democrats will be able to blame the other for the higher deficit. They'll do that laughing all the way to the polls while Wall Street, the military contractor community and macro economists everywhere erupt in cheers.



I still think

I still think there will be an eleventh hour can kick on the sequester. It will get postponed to April 15th (the budget deadline) or thereabouts. The real fight will be over the expiration of the CR on 3/27.

Rating agencies

You forget that the ratings agencies expect the deficit reduction. It is part of their calculus for the ratings on govt debt. If Congress voids the sequester, the ratings agencies will immediately downgrade.

Sadly, Canceling it is probably the best political option

It's second-best overall, since military spending is one of those cases where no one argues that the multiplier is anything greater than 0.6 or 0.7, and it's the best option for cutting excessive spending.

Given, as Jared Bernstein points out, that non-military social spending has already been cut to a ridiculous extent, it would be nice to see the deadweight spending cut as well.

But you're correct that that won't happen alone, and no cut is better than deeper muscle-cutting (op. cit. Janet Yellen's speech on the "slow recovery").

Rating agencies - who cares?

The agencies have a function when rating obscure debt. When rating well known debt like US treasuries, they don't add any value. Last time, they downgraded, the market yawned and interest rates actually went down.

As someone who is facing a

As someone who is facing a 20% pay cut due to the sequestration, I have one issue. Neither party cared about the $50B in Hurricane Sandy disaster. That could cancel half of sequestration. The "doc fix" is estimated to be $30B, yet, they didn't care about offsetting or keeping that in. It's the same thing you've pointed out over and over again... people wring their hands over the deficit, but no one wants to pay for it. So they minimize and specialize the targets.

Quite frankly, I'd trade downsizing the Federal workforce 10% through attrition plus the phased in 5% increase in my retirement benefits if the politicians could just stop putting a "gun to my head" over this decent middle class job I have which happens to barely support my family.

I bet mid-March, early April the Senate will move, pass a bill with 70-80 supporters and it'll be interesting to see what the House does.

I find it funny that the most liberal democrats were championing the tax increases in January, talking about how if they do nothing their party will win politically and taxes get raised on those at $250k. When the fiscal cliff deal was cut they complained hard. I think those on the right side talking about how if they do nothing they can win politically need to see what happened... the Democrats gave in and compromised. They didn't keep the hard line...

a note to Appreciative Reader

You write, and I understand: "Quite frankly, I'd trade downsizing the Federal workforce 10% through attrition plus the phased in 5% increase in my retirement benefits if the politicians could just stop putting a "gun to my head" over this decent middle class job I have which happens to barely support my family."

But this is the wrong way to think. Because no you can't afford to have fewer co-workers (depends on what agency you work for, of course, but look at how SS office hours are now pitiful and many other examples) nor to lose the 5% at this "decent middle class job that happens to barely support my family." But most of all because it would NOT stop there, yes you have been kicked around till you just are begging for it to stop, but if you reward this stuff and say, do these bad things if you will just stop this -- they INCREASE. There isn't any limit to how much those who want to punish the middle class will continue to want to do so . . . so don't encourage them.

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