You might have to wait longer in an airport line if the guillotine falls as scheduled Friday on $85 billion in federal spending. Your nearby national park might close earlier, and your schools might lose teachers.
But maybe not.
Or maybe not for a while.
There are plenty of unknowns as we head for the sequester, but there is one certainty: This is a risky moment to impose major federal spending cuts.
Two years ago, at least seven reports on debt reduction from liberals, financial firms, and bipartisan groups said it would be a bad idea to start cutting spending before the economy recovers. On the eve of the dreaded sequester, not only is the economy still dragging, the federal deficit is shrinking. Yet Washington appears unable to figure a way out of this problem.
President Obama’s invitation to Democratic and Republican leaders of the House and Senate to meet Friday is either hopelessly belated (the GOP view) or brilliantly timed, given the sky-is-falling headlines sure to greet the participants that day. It will be too late at that point to avoid the waste of time and energy the sequester has wrought or the anxieties of those affected. But there’s still about a month to maneuver before mass layoffs begin, so there’s still time to spare the overall economy a blow that experts say could imperil a fragile recovery.
“We don’t need additional austerity right now. The deficit is coming down. That’s austerity already,” said Democrat Alice Rivlin, a former federal budget director who coauthored a November 2010 debt-reduction report for the Bipartisan Policy Center with former Sen. Pete Domenici, R-N.M. “What most people forget is how much we’ve cut spending already. They act as if we’ve just raised taxes. We’ve cut discretionary spending a lot.”
Nondefense discretionary spending is on track to fall to record lows in the next few years as a result of budget deals since 2010, according to the Congressional Budget Office. Tax increases have included a hike in marginal rates for household income above $450,000 and the expiration of a payroll-tax cut enacted in 2009 to help ease the recession. The tax increases and spending cuts have functioned as twin drags on recovery, even as CBO reports that they have contributed to a declining deficit (7 percent of GDP, down from 10.1 percent in 2009).
Mark Zandi, founder and chief economist for Moody’s Analytics, a Democrat who helped advise Republican nominee John McCain in 2008, wrote one of the reports two years ago arguing against spending cuts. “The right economics” now would be to avoid any sequester cuts this year as the economy digests the earlier spending cutbacks and tax hikes, he says.
But given political reality, including what Zandi calls legitimate worries about whether delayed cuts would be cuts that never happen, he proposes a middle ground that would halve the amount of the sequester this year. “If the full sequester is implemented, that’ll shave at least a half a percentage point off GDP growth in 2013,” he said. “Half of that would be a quarter point. From an economic perspective, that would be manageable. From a political perspective, it would be doable.”
For the moment lawmakers are thinking relatively small, considering, for instance, giving Obama or executive departments discretion in how and where to cut spending. Rivlin, Zandi, and other economists say the best solution would be for Congress to enact the remainder of the grand bargain that Obama and House Speaker John Boehner attempted in 2011.
The ingredients of such an agreement have been obvious for months, if not years. The president has recently reiterated his interest in making money-saving changes in Medicare and Social Security, and more than a few Republicans are still amenable to closing tax loopholes. Democratic interest groups have kicked up a fuss about the prospect of entitlement trims, but what’s really standing in the way is the GOP’s insistence on no tax hikes—only spending cuts—in any deal that averts the sequester.
This is not a popular stand. In a Pew/USA Today poll this month, 76 percent said the president and Congress should pass a combination of spending cuts and tax increases to reduce the budget deficit, versus 19 percent who said tax hikes should be off the table. That’s the “balanced approach” Obama pitched on his way to a decisive reelection. He also bests the GOP in a new ABC/Washington Post poll in which 43 percent approved of his handling of federal spending, versus 26 percent for Republicans in Congress.
Respondents in an NBC/Wall Street Journal poll were split on whether spending cuts should proceed, but more definitive on whose agenda they prefer. Only 29 percent said they agree with what Republicans want to do in Congress, compared with 45 percent who agree with Obama’s proposals. That poll found the GOP out of step with the public on a wide range of economic and social issues, but the party did lead the Democrats on controlling spending.
This article appears in the February 28, 2013, edition of NJ Daily as Only Certainty As Sequester Starts Is Risk.