The Sequester Can Still Be Terrible

Even more spending cuts arrive in January. Can Democrats stop them if Americans don’t feel them?

National Journal
Catherine Hollander
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Catherine Hollander
Oct. 17, 2013, 5 p.m.

The im­me­di­ate im­pact of the 2013 se­quester was over­sold. Pres­id­ent Obama, in a typ­ic­al state­ment, warned in Feb­ru­ary that if the $85 bil­lion in se­cur­ity and non­se­cur­ity cuts were en­acted as sched­uled on March 1, “all our eco­nom­ic pro­gress could be put at risk.”

That’s not how it happened. Gross do­mest­ic product growth rose to 2.5 per­cent in the second quarter, up from 1.8 per­cent in the first. The in­crease in the GDP would likely have been high­er without the fisc­al drag, but the se­quester didn’t force the U.S. to re­live the eco­nom­ic trav­ails of 2008, as one tun­ing in­to the dooms­day rhet­or­ic might have ex­pec­ted.

“Throughout Janu­ary and Feb­ru­ary, the ad­min­is­tra­tion had one ‘the-sky-is-fall­ing’ story after an­oth­er,” says Barry An­der­son, a former deputy dir­ect­or of the Con­gres­sion­al Budget Of­fice and seni­or of­fi­cial at the Of­fice of Man­age­ment and Budget. “Here we are in the middle of Oc­to­ber “¦ the world hasn’t stopped spin­ning.”

Janu­ary will bring new spend­ing lim­its, part of the 2011 Budget Con­trol Act that cre­ated last spring’s se­quester, and an­oth­er round of dire mes­saging from Demo­crats who want to re­verse them. But even in 2014, the ef­fects aren’t ex­pec­ted to cause a mac­roe­co­nom­ic cata­strophe, and sup­port­ers of the blunt cuts and lower spend­ing caps are likely to point to the plod­ding GDP growth as evid­ence of their suc­cess as a de­fi­cit-re­duc­tion tool. The prob­lem is, that’s not ne­ces­sar­ily the best place to look.

The tax in­creases Con­gress passed as part of the New Year’s Day fisc­al-cliff deal had a big­ger im­pact on the eco­nomy in 2013 than the se­quester, says Paul Ash­worth, chief U.S. eco­nom­ist at Cap­it­al Eco­nom­ics, a mac­roe­co­nom­ics re­search com­pany. GDP growth de­pends not on the ab­so­lute level of de­cline in spend­ing — which will be lar­ger in 2014 — but on wheth­er that de­cline is big­ger or smal­ler than it was the pre­vi­ous year. Al­though next year’s cuts will be roughly $20 bil­lion more than this year’s, that’s just 0.125 per­cent of the $16 tril­lion eco­nomy. “That isn’t an aw­ful lot on the level of GDP,” Ash­worth says.

The miss­ing growth won’t be ap­par­ent in the head­line num­bers. In Ju­ly, CBO es­tim­ated that re­peal­ing the se­quester would add 900,000 jobs by this time next year, a siz­able num­ber in a coun­try where 11.3 mil­lion people are un­em­ployed. CBO also pro­jec­ted that GDP would be 0.7 per­cent high­er if the cuts were elim­in­ated.

“This pain that we’re met­ing out “¦ may not show up in high­er un­em­ploy­ment or lower GDP growth. These are quite gran­u­lar im­pacts,” says Jared Bern­stein, a former eco­nom­ic ad­viser to Pres­id­ent Obama and Vice Pres­id­ent Joe Biden. For the past six months, Bern­stein has been track­ing the pro­grams and people feel­ing the se­quester’s pinch. They in­clude Head Start, pub­lic de­fend­ers, rur­al res­id­ents who re­ceived rent­al as­sist­ance from the Ag­ri­cul­ture De­part­ment, and weath­er fore­cast­ing.

Op­pon­ents of the se­quester say the prob­lem is less about the re­duc­tion in spend­ing than the way the cuts are tak­ing place. “It isn’t primar­ily the size of either the fed­er­al budget or the de­fense budget that poses prob­lems; it is the dra­mat­ic change in the com­pos­i­tion of those budgets over the dec­ade — en­ti­tle­ments are push­ing out in­vest­ments. And [the] se­quester wor­sens that trend,” staff at the Bi­par­tis­an Policy Cen­ter wrote in a re­cent, bluntly titled re­port, “From Merely Stu­pid to Dan­ger­ous: The Se­quester’s Ef­fects on Na­tion­al and Eco­nom­ic Se­cur­ity.” “More pain is com­ing,” they wrote, “and it will be more in­tense.”

The ar­chi­tec­ture of next year’s cuts — $109.3 bil­lion sched­uled for fisc­al 2014 — will be dif­fer­ent. The Budget Con­trol Act (a re­sponse to the 2011 el­ev­enth-hour debt-ceil­ing fight) re­quires the fed­er­al gov­ern­ment to lop $1.2 tril­lion off pro­jec­ted de­fi­cits over 10 years. Where last year’s cuts were done with a “meat cleav­er,” across-the-board ap­proach, this time ap­pro­pri­at­ors can choose what to cut, so long as they stay be­low the de­fense and nondefense dis­cre­tion­ary spend­ing caps im­posed by the law.

That may sound prefer­able, but it prob­ably won’t mat­ter much from an eco­nom­ic per­spect­ive. Asked at a hear­ing last Feb­ru­ary wheth­er re­arran­ging the same level of cuts could help mit­ig­ate the eco­nom­ic pain, Fed­er­al Re­serve Board Chair­man Ben Bernanke told law­makers, “The near-term ef­fect on growth would prob­ably not be sub­stan­tially dif­fer­ent if you did it that way.”

An­der­son, the former OMB of­fi­cial, says 2014 is “a more ser­i­ous situ­ation” than 2013, but not be­cause the cuts are big­ger. It’s a ques­tion of “at­ti­tude and con­fid­ence.” Neither the fisc­al fights tak­ing place in Con­gress nor the broad strokes of the se­quester in­spire much con­fid­ence among those seek­ing a more per­man­ent solu­tion to the coun­try’s fright­en­ing long-term fisc­al-sus­tain­ab­il­ity prob­lems. At the same Feb­ru­ary hear­ing, Bernanke warned law­makers that the se­quester might even lead to less de­fi­cit re­duc­tion in the short run if it slowed the re­cov­ery. “To ad­dress both the near- and longer-term is­sues, the Con­gress and the ad­min­is­tra­tion should con­sider re­pla­cing the sharp, front-loaded spend­ing cuts re­quired by the se­quest­ra­tion with policies that re­duce the fed­er­al de­fi­cit more gradu­ally in the near term but more sub­stan­tially in the longer run,” he re­com­men­ded.

Re­pub­lic­ans didn’t sig­nal any will­ing­ness to lift the spend­ing caps dur­ing the latest fisc­al ne­go­ti­ations. Rich Lowry, the con­ser­vat­ive Na­tion­al Re­view‘s ed­it­or, said Tues­day night on Fox News as the House GOP debt-ceil­ing plan crumbled, “As long as Re­pub­lic­ans don’t lose the se­quester in this pro­cess, it is not a com­plete de­bacle.”

The deal Sen­ate Ma­jor­ity Lead­er Harry Re­id, D-Nev., and Minor­ity Lead­er Mitch Mc­Con­nell, R-Ky., reached set up a House-Sen­ate budget-ne­go­ti­ation pro­cess that’s been ab­sent so far this year. New ur­gency to al­ter the se­quester is un­likely, though; the eco­nom­ic data that come in between now and Janu­ary are un­likely to be very dif­fer­ent from what we’ve seen so far. So any pres­sure to re­vis­it se­quest­ra­tion will prob­ably come from else­where — namely, its im­pact on in­di­vidu­al gov­ern­ment pro­grams, not on the over­all eco­nomy.

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