The mess over the Sequester: Coming to terms with budget cuts and the fiscal cliff

By Oralia Valencia

Why do we need cuts in government spending? How did we get here? It’s difficult to determine if a sequester will damage the economy by hindering cash flow, or if it will help the economy by decreasing the budget deficit and slowing the rate of national debt.

The sequester follows a series of budget showdowns that began when the Republicans won a majority in the House of Representatives in 2010. The national debt reached the debt ceiling in 2011; Congress must approve raising the debt ceiling by approving additional spending.

Republicans in Congress would not agree to raise the debt ceiling unless there was an increase in spending cuts to reduce budget deficits. As part of the resolution, a bipartisan Super Committee was created to negotiate a deal to lower deficit spending and debt reduction over the next ten years.

The bipartisan committee set a deadline to resolve the issue by the following November; yet no agreement was reached. Since no compromise was achieved, the Budget Control Act known as the Sequester went into effect, causing automatic budget cuts.

The mandatory budget cuts were a last resort option and included cuts in government spending that Republicans and Democrats did not want to see happen. It was intended to be an incentive to force a compromise. Initially the sequester deadline was slated for January as part of the fiscal cliff which had been delayed until March.

The sequester is only one battle within a series of budget showdowns. The fiscal cliff in January included: the expiration of the Bush Tax cuts from 2003 and the trigger of sequestration as required by the Budget Control Act.

The expiration of the Bush tax cuts, also part of the fiscal cliff, was settled in January yet the issue of additional budget cuts demanded by Republicans remained. The White House is seeking revenue from closing tax loopholes as part of a budget deal to replace the sequester. The Republicans are taking a stand against increases in taxes as they seek further spending cuts for entitlement programs.
One problem is that budget cuts from the sequester do little to mitigate the increased spending on entitlements sought by Republicans such as Medicare, Medicaid and Social Security. According to the Congressional Budget Office spending cuts from the sequester of entitlement spending will account for a mere 4% portion of the total sequester cuts.

Since 2008, Republican Congress members have campaigned on the histrionics of the growing national debt; making the national debt and deficit reduction from spending cuts a public policy priority. They do have legitimate concern about the cost of entitlements as an increasing percentage of the budget.

As part of his effort to locate a solution to the issue, President Barack Obama proclaimed the need for balance during a White House press conference last week.
“We want a balanced approach to debt reduction,” Obama said. “We want to close tax loopholes and deductions that Republicans have supported along with spending cuts and to enact a jobs plan to grow the economy.”

When the government enjoyed budget surplus the economy was booming, unemployment was low, tax revenue was higher. The unemployment rate in 2000 was 4%, today unemployment has risen dramatically to 7.9%. Revenue collected by government from taxes is highest when unemployment is lowest. If congress wants to solve the budget deficit problem they first need to work together to solve the job deficit problem.
Republicans and Democrats have a plan to replace the sequester because neither side of the aisle favors the mandatory cuts. However, the two sides disagree on the specific terms on different proposals and no one is willing to budge.

The greatest risk to the economy in the short run is waning consumer confidence. Households respond to worries related to income by spending less on goods and services, causing unemployment rise. The CBO reports that the sequester will push the unemployment rate to 9% from the current 7.9% rate this year, causing people to lose their jobs.

Bully tactics have been wielded by some House Republicans who seek to schedule chaos throughout the legislative calendar. They refuse to consider a plan to include closing tax loopholes in order to get cuts in government spending. Their method is to run the clock and ruin the president’s second term, to lurch from the fiscal cliff to the sequester, then approach another debt ceiling debate.
As we swing from crisis to crisis with little time to recover from previous self-inflicted wounds confidence in government by the American public takes a hit.

The more serious blow comes from a continuation of gridlock and dysfunction over the next several months. Each episode in the budget battle series is designed to diminish our confidence in government – entrenching us further in a negative feedback loop. The spiral of continued inefficiencies and dysfunction lead to a crisis of confidence.

Taking unpopular positions may work within Republican conference politics in the House of Representatives but they do not necessarily align with views held by the Republican electorate at large.
Steve Schmidt, Chief Republican Strategist for the McCain campaign in 2008, put the blame on the threat of a primary.

“Republican members of congress are terrified of compromising because they fear a primary challenge,” Schmidt said. “And if John Boehner agrees to increase revenues and makes a deal with the president the consequence is that he would lose his speakership.”

Recently, a new political action committee has been formed to apply pressure on Republicans who may waiver from their anti-tax pledge. They are open for business at
The federal debt of $16.5 trillion is an astonishing number. However when analyzing the greatest risk to the economy it is important to consider an even larger number: $700 trillion in the global derivatives market much of which is tied to the largest banks in the United State.

During the 2008 financial crisis, derivatives on mortgages traded by big banks compounded the crisis at great cost to taxpayers in the form of bank bailouts. Significant risk is also present in the financial markets.

Steve Denning from Forbes reported in January this year “In 2008, governments had enough resources to avert total calamity. Today’s cash strapped governments are in no position to cope with another massive bailout.”

Another risk to the economy is our international perception, especially from U.S. creditors and trade partners. They could begin to lose confidence in American lawmakers’ willingness to responsibly govern. A pessimistic view of how we govern and interact in the world economy could raise investor anxiety and increase risk to the financial markets; thereby suppressing capital growth.

The stock market has recovered the benchmark standards from before the recession hit. DOW has crossed a recent 14000 high, yet there are no guarantees in a banking system that is supposedly ‘too big’ to fail. Today the industry enjoys record profits. Over the same period, unemployment remains high and wage growth has stayed flat according to the Bureau of Labor Statistics.

It is time the House and the Senate, at a minimum, works towards suppressing unemployment and try to work past the sequester. Congress should stop their “take no prisoners approach” to the series of budget confrontations scheduled on the calendar this year.

It is also time for voters to realize the difference between chicken-little bombast and an actual imminent threat to the economy from the national debt by being persuaded by fear-riddled rhetoric from Washington.