While many are suggesting that the first year sequester cuts weren’t that bad, they are generally unaware that the sequester bill included five years of scheduled across the board spending reductions.
So let’s take a look at what has happened already and then what is coming.
According to the U.S. Bureau of Economic Analysis, over the first half of 2013, the federal government has subtracted 0.8 percentage point from GDP growth—this as the economy grew a paltry 1.1 percent in the first quarter and 1.7 percent in the second.
The CBO has projected that if the next round of sequester cuts were canceled, we would see another .7% in GDP growth and add another 900,000 jobs by Q3 2014.
As Business Week says, this isn’t rocket science. “We’re living through the biggest contraction in federal spending in 60 years, and this is one of the weakest recoveries on record. Coincidence?”
Conservatives counter that every dollar that isn’t spent by the government goes back into the pockets of taxpayers. The implications are that individuals will spend that money in the same ways that the government will, we will see the same growth, and we will be better for it because the government is inefficient and political. The problem with this simplistic view is that in uncertain times like this individuals DO NOT spend their money. Instead they reduce their debt and increase their savings. Businesses respond to reduced demand by doing the same thing. So we end up with a lot of cash sitting on the sidelines and economic growth slows, which is where we are today.
The CBO says we are operating 6% below our capacity right now. That is $1T in economic capacity that is sitting idle because of lack of demand. The problem, for anyone willing to take a look, is clearly NOT too much government spending. It is too little consumer demand.
Here are a few more quotes if you remain unconvinced.
“The idea that spending cuts generate growth in a demand-constrained economy is nonsense,” says Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities.
“To say the sequester is good for the economy is wrong on a scale that’s impressive,” says Neil Dutta, chief U.S. economist at Renaissance Macro Research.
“I don’t know how you can make that claim,” says Stuart Hoffman, chief economist at PNC Financial Services Group, who estimates that the sequester has stolen about 30,000 jobs from each month’s payrolls total since it was enacted in March.
If there is good news in this story, the economy appears to have survived the assault with a blunt instrument that the first sequester administered. We are now in a position where the GDP can grow faster than the debt. That means simple focus on short term economic growth will likely complete the recovery and put us back in a situation where debt as percentage of GDP is going down even though the debt in absolute terms may be going up.
So what is the Republican agenda?
First, threaten to shut down the government if Obama doesn’t repeal Obamacare.
Second, threaten to throw the government into default, if the Obama administration doesn’t agree to ANOTHER round of spending cuts in addition to what is already on the books.
So it doesn’t sound as though there is much political appetite at the moment to replace the sequester with something more constructive and there is certainly the possibility that it will get worse before it will get better.
That said, here’s a short list of the impacts we’re dealing with beyond those already mentioned.
This next round is going to impact states even more than the previous cut. States will see $4.2B less in federal funding. Targeted programs include public housing assistance, money for schools with low-income students, food inspection, scientific research grants, and environmental protection programs. While states absorbed a $4.6B cut last year through reductions is staff in reductions in programs, this year they will be forced to start eliminating programs completely.
The other state complication is that most states are required by law to balance their budgets and the 2014 budgets have already been passed. If the next round of sequestration is implemented, most states will start their fall legislative terms with significant budget shortfalls.
“They are already in a difficult spot because they already have imposed major cuts to their schools and other public services,” Leachman said. “If they enter those legislative sessions having to deal with additional cuts in federal funding for schools or law enforcement or clean water or programs that help low-income families, that makes their job even more difficult.”
Pennsylvania budget secretary Charles Zogby said his state managed to get through the first round of sequestration budget cuts without massive cuts in personnel—but that may change. “Thus far, that hasn’t been part of the challenge. It may be in round two,” he said.
Headstart, one of the most successful programs we have to alter the future of poor kids, is going to have to cut fall enrollment by 57K because of sequestration cuts.
The federal public defender system has been decimated by the sequester cuts. According to the WSJ, this ends up costing tax payers more than what has been saved through the cuts because our constitution guarantees that those who cannot afford an attorney will have one appointed for them. When public defenders are not available, court dates are delayed and courts ultimately hire private attorneys. We pay for all that.
Overburdened defenders also make mistakes and miss evidence that could have cleared their clients. These mistakes create more appeals. As Supreme Court Justice Stephen Breyer noted in March in congressional testimony about the effects in general of the sequester, it is “cheaper to have a decent lawyer in the first place.”
Even George Will decries the effects of reductions in basic medical research caused by the sequester.
For Francis Collins, being the NIH’s director is a daily experience of exhilaration and dismay. In the past 40 years, he says, heart attacks and strokes have declined 60 percent and 70 percent, respectively. Cancer deaths are down 15 percent in 15 years. An AIDS diagnosis is no longer a death sentence. Researchers are on the trail of a universal flu vaccine, based on new understandings of the influenza virus and the human immune system. Chemotherapy was invented here — and it is being replaced by treatments developed here. Yet the pace of public health advances, Collins says, is being slowed by the sequester.
This will be, Collins believes, “the century of biology.” Other countries have “read our playbook,” seeing how biomedical research can reduce health costs, produce jobs and enhance competitiveness. Meanwhile, America’s great research universities award advanced degrees to young scientists from abroad, and then irrational immigration policy compels them to leave and add value to other countries. And now the sequester discourages and disperses scientific talent.
The sequester has also reduced our ability to manage our forests which has contributed to the unprecedented scale of wildfires that we’ve had to fight.
The Hazardous Fuels Reduction Program was $500 million last year, went down to $419 million this year under the automatic budget cuts, and has been proposed to go to $292 million next year.
“The fires that are ripping through Oregon and Idaho and California and the West are just proof that the fire prevention policy is broke,” Sen. Ron Wyden, D-Ore., chairman of the Senate Natural Resources Committee, said from Lincoln City.
“There are years of neglect. The fuel load builds up and it gets hotter and hotter on the forest floor. Then you get something like a lightning strike and a big inferno. Then the bureaucracy takes money from the prevention fund to put the fires out and the problem gets worse. The cycle just repeats itself again and again.”
This brings us to the basic question of why.
The only answer I can come up with is that Republicans have lost touch with reality. They have won the war against debt. Rather than take a victory lap and set themselves up for a potential change in control in the senate, they are determined to pump another bullet into the wounded economic recovery.
Their fantasy that cutting government spending would stimulate economic activity has failed. We can now document the damage it did to the economy. With the second round of sequester cuts looming, we have an opportunity to reduce the damage. Just stopping the austerity program will have a positive economic effect. But we can’t seem to even have a rational discussion on how to do that simple thing because of ideology and politics.
Since it is unlikely that Republicans will unilaterally abandon the ideology that is driving their actions, the only other possible solution is a political one. If Republicans suffer another defeat in 2014 similar to what they experienced in 2012, maybe then the survivors will finally realize that there are real political consequences to imposing a minority agenda on an unwilling majority.