Monday, February 25, 2013

Sequestration Cuts or Confusion?

It looks like we will be hearing a lot about the so-called "sequestration cuts" this week.  These are the automatic spending cuts that the Obama Administration proposed 18 months ago as a way to avoid the debt ceiling showdown of August, 2011.

The idea at that time was to put some automatic "sequestration cuts" in place, split half between Defense and Domestic Discretionary programs, and hang like a Sword of Damocles over the heads of both Republicans (Defense) and Democrats (Discretionary) so that they would find a way to compromise before the sword dropped.  We are now less than a week away from the sword doing its work and there is no compromise deal in sight.  It all sounded so good a year and a half ago!

The Obama Administration is busy claiming these cuts are going to be so disastrous and draconian that you should believe that all government will immediately cease.  Of course, the worse nightmare for Obama and the Democrats would be that the cuts went into effect and nobody noticed.  Therefore, they are sure to try to insure that any cuts will be calculated to cause as much inconvenience for the taxpayers of the country as they can.  

You will be told that your tax refund will be delayed 6 months because of a cutback in the IRS refund processing section. We will see the TSA cut back so that you have to wait an hour and a half to get through airport security.  Once you get through security you will find that your flight has been cancelled because the air traffic controllers have had their hours cut.  Your child's 8th grade Spring trip to Washington, DC will be a bust because all of the national monuments were closed.  You need to wait an hour to fill up your tank because the oil refinery inspector got laid off and that delayed the gasoline delivery to your gas station. You get the idea.

Of course, billions and billions of dollars of waste and fraud in federal spending will continue.  There will no thought to looking into those areas to find the necessary cuts.  That might involve too much work.

How big are the sequester cuts?  This chart by Dan Mitchell puts it into context.

We are talking about $45 billion this year and about $85 billion per year in subsequent years.  For 2013, this represents a little more than 1% of projected total federal spending of $3.6 trillion for the year.  In 2014 and beyond it is a reduction of about 2.4% of projected spending per year.

Since the large entitlement programs like Social Security, Medicare and Medicaid are off limits in the sequestration cuts the actual cuts to Defense and Discretionary programs are larger.  For Defense in 2014 these cuts will trim about 8% of its budget.  For Discretionary programs it is about a 5% reduction.  However, in the case of Discretionary programs, they are already up about +17% since Obama took office so a 5% reduction should be hardly noticeable in the fullness of time.

Here is another chart prepared by the Heritage Foundation that shows the same thing in a different format.

As you can see from the chart above, there is nothing about the "sequestration cuts" that is cutting anything when it comes to overall federal spending.   Even with these "cuts" we will be spending $2.4 trillion more ten years from now according to the most recent CBO projections.  Between 2013 and 2021, it is about $1.6 trillion.  You can see the projected increases in federal spending categories in the chart below that was produced by Veronique de Rugy of George Mason University.

Even with sequestration in effect, both Defense and Discretionary programs end up with just a 2% smaller increase between now and 2021 than they would otherwise have.  In other words, Defense spending will only increase 18% rather than 20% and Discretionary spending will only go up 12% versus 14%.

I think the interesting thing about how this has played out is that President Obama suggested the sequestration alternative back in 2011 because he did not believe that the Republicans would ever allow the Defense sequestration cuts to take place.  He appears to have misjudged their resolve on this issue.  His only real plan to avoid the cuts seems to be to suggest another tax increase on the rich.  However, that appears to a non-starter since he got his tax increase last month.  That puts him in a tough spot.

The only way out for Obama is to make life as difficult as possible for the American people and blame the cuts on the "unreasonable" Republicans and hope he can carry public opinion his way.  For that reason, the Republicans have to tell the real story to the public and they need to provide authority for each federal government agency for the full discretion to make the cuts as non-dispuptive as possible.  This then allows them to call each agency head before them to explain how they could not manage their budget better if we see disruptions.  Are they not effective public servants?

It will not be easy.  It never is easy when Obama has the bully pulpit and he has the mainstream media in his pocket as well.  However, if we can't take these minimal steps to get our budget under control, I am not sure anything short of an outright crisis will force any action whatsoever on our out of control spending.  That movie will probably be coming to a theatre near you at some point.  Unlike Lincoln, Argo and Zero Dark Thirty, which all showed examples of where our government worked for good, I don't think the script of that movie is going to be as positive.  That may mean it may be a while before we see another Oscar presented at The White House.

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