The Sequester, What’s its Deal?

The answer is it’s some economically damaging bullshit that won’t change our debt outlook. 

Blah blah automatic spending cuts, you get the point. Basically, it will cut around $1 trillion from government debt over the next ten years. $85 billion will be cut from the 2013 budget[1]. While those may be relatively small numbers compared to federal spending, it’s ignorant to think they are harmless. There’s a new and gathering body of evidence that shows government spending has a proportionally larger effect on the economy in times of economic weakness; cutting spending now is especially damaging to current economic growth.

Furthermore, the design of the cuts is especially inefficient. The cuts are across the board, meaning affected departments cannot pick the least effective programs to cut; they will be cut as much as the most needed programs. The cuts also treat any dollar the government uses as spending, when in fact much of what is being cut is investment. This is similar to saying you “spent” money by putting it in a retirement account. The government invests money in infrastructure, education, research, etc. which leads to future benefits. But investment will be cut the same as consumption or transfer payments, meaning the future benefits will be cut too.

Ignoring the horrible design, many have argued that the pain is worth the result. But the sequester fails to make significant cuts or change the long run trend in government debt. If current laws remain the same, federal debt will amount to $20 trillion by 2023, and will be growing by over $1 trillion a year. All the sequester does is buy a year of time through one-off cuts.

While 5% reduction in debt is still something, and we need to cut spending whether taxes are raised or not, the cuts that come in 2013 are especially damaging and foolish. The CBO and Macroeconomic Advisors (MA) project that the first year of cuts ($85 billion) will reduce economic growth by 0.6% in 2013. The CBO forecasts 750,000 less jobs by the end of 2013 than would be the case without cuts; more optimistically, MA projects the job losses, of 700,000, would take until the end of 2014 to fully occur[2]. This is for the equivalent of one month of spending by 2023. Why not push it back a year? It’d still be the same amount of spending without derailing what should otherwise be the best year of the recovery so far.

In the longer run, growth is projected to return to “normal”. My argument against that outlook is that the models they use don’t reflect dynamic factors such as the cost of poor infrastructure, or the inefficiency and inequality of an underfunded court system and other vital government functions. But leaving aside the fact that a functioning government is better for the economy than anarchy, the cuts are coming too early, and to the wrong areas of government spending. If we don’t reduce the spending growth of mandatory programs (which is primarily Medicare, Medicaid, and Social Security) then we will have gained nothing, at a high cost to the recovery. One only needs to look to Europe to see how a policy of spending cuts in a weak economy results. 


Also interesting is this map of the geographic impact of the sequester. The great and well run state of Maryland will suffer disproportionately due to the poor decisions of congress.







1. Though only around $41 billion of the “spending authority” cut is estimated to be actually spent this year

2. Let’s keep in mind that Republicans are generally enthusiastic about cutting spending to reduce the debt but repulsed by the idea of raising taxes, especially on the rich, because they are “job creators”. And we shouldn’t derail the recovery by reducing job growth through taxation.