Sequester 101: Is all this fuss really necessary?
The sequester spending cuts set to kick in March 1 address a serious long-term problem. But are they needed this year and in this way? No one thinks it's a perfect step.
The federal government is about a week away from major spending cuts called the "sequester," which are poised to affect most federal programs in a sudden and significant way.Skip to next paragraph
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But is this focus on fiscal discipline really necessary?
Well, yes and no – and if that sounds wishy-washy, hang in there.
"Yes" is the long-term answer. Persistent federal deficits driven by increases in entitlement spending must be dealt with. If they are not, forecasters say, the rising national debt will, at some point, significantly damage the country’s economic health. The debate is about when that damage will arrive, not whether the problem is a real one.
"No" is the shorter-term answer, because economists are divided about whether the federal government should tighten up on spending during the current fiscal year. Even those who support spending cuts don’t like the rigid nature of reductions that mandated in the sequester, which are split equally between defense and a wide range of non-defense programs.
In the end, if the sequester forces Congress to talk constructively about the shape of fiscal policy, it could serve a purpose beyond the spending cuts.
“Debate is healthy and long overdue on entitlements,” economist John Silvia of Wells Fargo writes in a recent analysis of US fiscal affairs. Programs like Medicare, Medicaid, and Social Security “make up the largest share of federal spending and the fastest growing segment of spending.”
But where does that conversation need to go? Here’s a look at some of the arguments that some politicians and pundits are making in the fiscal debate:
Perception: We could solve this whole deficit problem if we’d just _________ (insert solution here: raise taxes, cut spending, etc.)
Reality: If you hear an argument saying the solution is all about some tax hikes, or spending cuts, or even a mix of the two, remember this: There’s another big part of the equation called economic growth. Economists worry when the national debt is large or rising relative to the size of the economy.
Right now, it appears to fit the definition of “large” – with gross federal debt roughly equal to a year’s gross domestic product (GDP). When the debt was similarly high after World War II, the nation successfully reduced that debt during the next two decades, as a share of GDP. Annual federal deficits weren’t eliminated, but they were outpaced by growth in the private sector.
Yes, tax policy and spending policy are vital elements of the mix. But both need to be paired with a growing economy.
Perception: Federal spending is out of control, thanks to President Obama.
Reality: The notion that federal spending is out of control is open to debate, but some of the overall numbers don’t look worse for Mr. Obama than for other presidents. Discretionary spending is poised to be lower this year than it was in 2008 or in 2009, the fiscal year during which Obama took office, as a share of GDP. That's according to historical budget numbers reported by the White House.