Sequester11

Sequester Politicians’ Salaries, Not the Economy’s Future

Here are some questions and answers about the forced spending cuts that could occur next week as a result of the Budget Control Act of 2011, better known as the sequester, and a proposal for a better mechanism:

Is now a good time to cut wasteful spending? It’s always a good time to cut spending that doesn’t provide essential services or contribute to economic growth. But, at least in the first year, the sequester does not allow agencies to decide cuts on a program-by-program basis; the cuts are across the board. It’s not clear how much is fat and how much is muscle and bone.

Is now a good time to make across-the-board cuts at the agency level? It’s almost never a good time to make arbitrary, across-the-board cuts in spending. The only time governments typically do this is after a fiscal crisis, when they have to show the markets that they’re truly committed to tightening their belts. The United States is not in a fiscal crisis. Last week the Treasury borrowed about $16 billion in 30-year bonds at a median yield of just 3.139 percent – and the bond issue was oversubscribed almost three times over. What the nation really needs is to examine the composition of spending, not the overall amount.

Is now a good time for big spending cuts in general? No. The economic recovery is still fragile. The Bureau of Economic Analysis estimated that the economy shrank at an annual rate of 0.1 percent in the last quarter of 2012, though that figure is likely to be adjusted upward. New housing starts fell by 8.5 percent, much more than expected, in January. The unemployment rate is still close to 8 percent. The economy is not out of the woods yet – not by a long shot.

Moreover, the sequester wouldn’t just create $85 billion in cuts for the rest of this year; those cuts would be kept over seven years, resulting in a total decrease in spending of about $1 trillion. Because consumers and markets are forward-looking, the economy will feel the full force of those cuts right away as expectations about future income and investment change. That’s why letting the sequester go ahead could do a lot more damage to the economy than some pundits would have you believe.

A better plan would commit the government to phasing in spending cuts based on internal reviews by a non-partisan agency such as the General Accounting Office. The cuts could still be large, but they would occur gradually and not in the next couple of years. The problem is that Congress has a hard time keeping its promises several years into the future.

Perhaps if the penalties for reneging hurt the politicians themselves – not the American people – then they would comply more readily. For instance, if members of Congress and the president would lose their salaries if they failed to accept the promised cuts, they’d be a lot more credible. But what member of Congress would ever accept that kind of sequester?

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