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The Economics of Sequestration

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The Economics of Sequestration

Delaying the sequester process for two months confirms that business as usual is well on Capital Hill. The egregious idea of abiding by a former deal that would trigger automatic spending cuts is just too much for Congressional leaders to bear. March 1, 2013 is said to be the new due date. Senatorial magic escapes any semblance of facing up to the obvious. Administration spending is so habitual that even a government shutdown is immune from observance. The true economics of sequestration centers within the next imaginative episode of delay and denial. It is little wonder that commerce and business is a far more risky endeavor, when the principal problem of the national debt is abnegated as an excessive spending crisis.

Martin Willard reports in Preparing for Sequestration and Budget Cuts.

"Under the Budget Control Act of 2011 (the Act), sequestration is the automatic reduction of spending triggered if Congress approves spending levels that exceed certain "caps" set out by the Act. Although certain programs-Social Security, Medicaid, federal retirement programs and Medicare-are protected from the full impact of sequestration, spending reductions would occur largely across the board under the Act."

However, these cuts are not all made equal. The disproportion emphasis on the Defense Department from the discretionary agencies has received attention. While many auditors would agree that the bloated expenditures within the military-industrial-complex has much to do with an adventurist foreign policy, the architects of sequestration refused to do a straight across the board reductions in all budgets. Do not simply blame your elected officials. Examine the devil in the details.

Even if the sequester goliath hit the DC Bastille the way it would be dispensed has ample wiggle room. An analysis in a joint report from BPC's Task Force on Defense Budget, the Strategy and the Economic Policy Project and the Foreign Policy Project, provides different rules for Sequester cuts.

"Section 302 of the BCA (which contains the legislative language on the implementation of the sequester), however, does not state clearly how the sequester will be carried out. Specifically, two possible interpretations of the sequester are: 1) It is intended to make cuts to discretionary appropriations and mandatory spending that add up to $1.2 trillion (less assumed debt service savings) over ten years (although no cuts occur in 2012, the first year), or 2) It is intended to reduce the deficit by $1.2 trillion (less assumed debt service savings) over the ten-year budget window. While at first blush these may seem identical, the former interpretation would produce significantly less deficit reduction in the first decade. This is primarily due to the timing difference between discretionary appropriations (the resources that are made available) and outlays (actual spending, which lags the appropriations)."

Bureaucratic discretion provides benefits for selected economic endeavors and punitive penalties for those not in the politically favoritism loop. When an all-encompassing standard reduction percentage is rejected, the end product is a "politically correct" methodology for implementation. Appreciate the final decision authority given to the CBO.

The Congressional Budget Office fills in the particulars about the Spending Reduction Act of 2012.

"Under the Balanced Budget and Emergency Deficit Control Act of 1985, as amended by the Budget Control Act of 2011, CBO is required to provide estimates of the caps on discretionary budget authority for each year through 2021 and whether a cancellation of budgetary resources (or sequestration) might be necessary if those caps are breached. The Administration's Office of Management and Budget has sole authority to determine whether a sequestration is required and, if so, the proportional allocations of any necessary cuts."

It is a nice thought that there is a firewall within the process. Taking away the influence of the lobbyists is a daunting task, but before this kind of experiment can be undertaken, the reluctance of the legislature that actually allow automatic spending reductions, must be accepted.

If past history is a guide, the prospects that another sleazy backdoor deal will accompany the next increase in the debt ceiling.

What is absent from the normal political equation is an honest evaluation of the economic consequences of a significant cutback in government spending. Business will benefit from a step-down in usual base line increases in public funding of inefficient agencies. The notion that federal programs will disappear under sequestration is nonsense. Nonetheless, an initial departure from reflex spending increases would send a significant message to the business community.

Critics will falsely claim that any diminution in public spending will weaken the economy. Lacking in financial common sense or entrepreneurial experience, most corporate economists are simply addicted to federal handouts.

The momentum that flows from forcing fiscal discipline would be a watershed incentive to unlock pent-up capital that would start a renaissance in investments and economic growth.

The tragic consequence under state/capitalism is that government picks winners and losers. Since rational financial policy is a political penalty to re-election in the dependency society, the best that can be expected currently is to allow a mechanical sequestration to go into effect.

Fear mongering that the social safety net will be stripped in the face of 47.7 million participants on Food Stamps merely institutionalizes the endless growth in federal spending. Sequestration is an imperfect tool, but when you are drowning in a sea of red ink, the medicine needed to start a cure, the patient must accept the challenge to restructure the federal bureaucracy.

The economy is a dynamic engine of prosperity when allowed to transact commerce under the principles of a free market. The fiasco of central planning and crony capitalism needs a major shakeup. Since the career politicians have flunked in their fiduciary responsibilities and constitutional duties, the temporary pain for federal public employees is a small price that needs to be paid in order to begin a correction in the ship of state. How else to prove a cynic wrong? Unless the sequester procedure begins, complacency on the Hill will just continue the feeding frenzy of Washington elites.

James Hall – January 16, 2013 

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