Wednesday, February 27, 2013

Sequestration: The Hype That Shouldn't Be

Last December, the world was supposed to end because the Mayan calendar predicted the apocalypse. Looking at political commentary, I'm expecting a similar breakdown of society due to the sequestration "cuts" that are planned to take into effect on March 1, 2013. The sequestration consists of $1.2T of spending "cuts" over the next ten years. $88B of which are supposed to take place this year, and that doesn't consider the fact that the government will do away with $44B of those "cuts" (CBO, p. 11). The Pentagon is threatening hiring freezes and furloughs, particularly since about half of sequestration "cuts" affect the military. Heritage Foundation is complaining about how the sequestration will undermine national security. The White House and the Democrats cannot help but scare the American people. Liberals complain because Meals on Wheels will be put on hold, quality of education will worsen, and sequestration will increase the likelihood of health risks. Sequestration is something that makes both sides of the aisle nervous. What comes to my mind is the following: are we going to experience societal dysfunction if sequestration goes through or is this an example of Big Government incapable of taking a small dosage of the medicine it needs? Unsurprisingly, my answer is "the latter." Rather than give into emotionalism, I think it's prudent to put the spending "cuts" into perspective:

Government spending is not decreasing. You might be wondering why I have been putting the word "cuts" in quotation marks. That is because when we look at the big picture, these aren't actual cuts. If the government were to experience actual cuts, there would be a net decrease in government spending from the previous year. What is going to take place is decreases in initial projected baseline increases, not spending cuts. The Congressional Budget Office (CBO) shows that our federal budget will nearly be $3.6T (Table 1-1) this year, which translates into about spending cuts about 1%. Looking at Summary Table 1 of the CBO report, net government expenditures [in real dollars] still increase.  



Defense spending can take a "hit." Defense spending is 4.7% of the overall GDP and about 18% of the federal budget. The United States has more military spending than all the other major militaries combined. If the full sequester goes into effect, the defense budget will drop 31% from the 2010 peak to the 2017 trough. We've already pulled out of Iraq and we're looking to pull out of the pointless war in Afghanistan by 2014. Since both of those military expeditions will be eliminated shortly, there is no need to increase spending. Let's also consider that in the next ten years, the federal government is planning on spending over $7T [in nominal dollars] (See Table S-4) on defense spending and defense spending actually increases over time (ibid). With the sequestration, the CBO still calculates that the defense budget will still be over $6.4T [in real dollars] (See Table 1-5), not to mention that the Pentagon will still have about $500B per annum and overall military spending in real dollars will exceed current levels by the year 2019 (ibid).  In the grand scheme of things, cutting $500B from $7T is not a huge cut.

Bottom Line: Hysteria like this frustrates me. Anything that resembles a "cut" is, in aggregate terms, negligible to the fact that the government is still increasing its overall spending. Much like with the case in Britain, the "anti-austerity" crowd wants to bemoan the implementation of faux spending cuts and how spending cuts don't work, even when these "cuts" are only 0.03% of our GDP. This sort of scare tactic is used by those who think that we can spend our way out of an economic crisis and that we should perpetuate the "tax and spend" mentality because of the misconceived notion that government creates economic growth.

Even the perceived threat of spending cuts gets people all riled up. Considering that the net debt-to-GDP ratio is about 87% right now and projected to rise, I'd be worried since it affects our country's credit risk, which affects our economy's overall well-being. I would have preferred that the sequestration targeted Social Security and other forms of entitlement spending in addition to defense spending. I wish that we had real spending cuts that would help with deficit reduction and get our fiscal house back in order. Even if the sequestration "cuts" only modestly cut back initial baseline increases in spending, at least it's a modest beginning in the right direction that might even get the government thinking about how it spends its money.

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