Democrats ‘Over-dramatized’ Sequester Consequences

‘Okay, it won’t be THAT bad.’  That was the message from President Obama and the Democratic Leadership after the deadline for the Sequester had passed and the cuts went into effect.  This is after a week of posturing, with doomsday claims of National Security risks, teacher layoffs, longer lines at airports, and all sorts of other nasty and unpalatable things.  Then the Sequester came, and went, and now it’s just gonna be a little inconvenient.

Huh?

The Congressional Budget Office (CBO) still projects that the Sequester will cost the U.S. economy about 750,000 jobs this year, as well as up to a 2% reduction in economic growth.  Those are relatively big numbers, but since the economic indicators going in to 2013 have been so good, that may not – in the abstract – be as terrible as once feared.

Manufacturing is up.  Businesses are starting to spend the trillions of dollars they've been hoarding since the Great Recession.  The Department of Labor released numbers showing a decline in the number of people claiming unemployment – dropping to numbers closer to where they were before the recession.  Also, the economy didn't shrink in the last quarter of 2012, as was originally forecast; it eeked out a 0.1% gain.  That’s still not great, but it’s better than an economic contraction.

I believe that the Democrats, who saw the polling and felt that the American People were behind them, decided to try and use the Sequester the same way they used the fiscal cliff.  They wanted to use it as leverage to get the Republicans to cave on revenue increases by closing tax loopholes for the wealthy.  They thought that the Republicans would read the tea leaves and see that it would not be politically palatable to allow the Sequester to happen, especially with the heavy-handed cuts to defense.

Well, it didn't work.  Republicans didn't cave, and now the cuts are in place.  In a way, this is a short-term victory for Republicans on a policy standpoint – they managed to shrink Government.  $1.2 Trillion cut from the government is something nice to run on in 2014 in most conservative circles.  It will also be helpful if the economy overall keeps growing, thus keeping any of the harsher effects of the cuts from seriously impacting the American people.

So, what was gained by the Democrats in this latest self-inflicted ‘crisis’ we've experienced?  Time will tell, but current polling suggests that the American People still favor President Obama’s and the Democrats’ policies for deficit reduction.  It also should be noted that, the Sequester notwithstanding, that President Obama has reduced the deficit each and every year he’s been in office.  In 2009, the budget deficit was $1.26 Trillion.  In 2010, it was $1.19 Trillion.  In 2011, it was $1.01 Trillion.  In 2012, it was $901 Billion.

The budget deficit is shrinking, slowly, and early CBO estimates for 2013 – which include the Sequester and the return of the Clinton-era tax rates on income over $400,000 – anticipate an acceleration of that shrinkage, projecting a budget deficit of $400-500 Billion.  If that trend can continue, President Obama could achieve a balanced budget by the end of his 2^nd term – a feat only Bill Clinton has achieved in the past 50 years.

So why did President Obama and the Democratic Leadership jump the gun and start bludgeoning the Republicans and the Nation with these doomsday scenarios about the Sequester when, in the long term, it would be helpful?  I don’t know, but I have a theory.

The Democrats and President Obama have wanted to eliminate corporate tax loopholes, tax subsidies for large agriculture conglomerates, oil subsidies, and cap deductions for the wealthy.  The CBO estimates that those changes to the tax code could net up to $2.1 Trillion over the next 10 years – with $250 Billion coming in the first year.  That, combined with President Obama’s suggested adjustments to Medicare in how it negotiates prices with providers and drug manufactures – which the CBO said could net an additional $100 Billion in savings annually – would provide $350 Billion of additional money for this year’s budget.

 

That would put them within spitting range of a balanced budget, using Democratic policies, right in time for the 2014 mid-terms.

I believe the Democrats wanted the Sequester, but they wanted to direct the cuts less broadly – something that was echoed by Speaker Boehner.  However, there’s always disagreement as to where those cuts should occur.  The Republicans are correct in their assertion that Social Security and Medicare are the chief drivers of our national debt.  But their insistence on cuts to those programs, I believe, is less about solving the budget deficit and more about dismantling the programs entirely, since entitlements by their very nature go against the Republican ideal of smaller government.  An ‘entitlement’ makes one dependent on Government, in their view.

All in all, I think the Republicans won the short-term game in the Sequester battle.  It’s unlikely that a ‘Grand Bargain’ will ever come as long as we have divided Government.  Depending on how the 2014 mid-terms turn out, we could see a return to Democratic control of Washington, or the GOP could retain control of the House, continuing the gridlock, or the GOP could keep the House and re-take the Senate, which could be very interesting.

But all of this is moot, at this point.  Unless the Congress can pass a budget or a continuing resolution in the next 3 weeks, the Government will shut down.

Good Times!