United States: Sequestration’s Impact Limited, Unfair and Ineffective

Over the past few weeks, elected representatives and US federal agencies have been very vocal about how the US economy and security will be damaged by the congressionally mandated budget cuts known as sequestration.

These cuts were first agreed to as part of the Budget Control Act of 2011 under the assumption that if the US Congress passed a bill filled with ridiculous mandates, even ideologically hardened legislators would have no choice but to compromise.

Clearly, these legislators don’t know their colleagues very well since no agreement has been signed and, consequently, the US government – and the nation – is bracing for funding cuts that will be spread through defense and non-defense agencies between 2012 and 2022. I believe that while these cuts will be painful, their impact won’t be as dramatic we are being led to believe.

Before getting to that though, let’s focus on the inanity of these cuts: Non-discretionary programs such as Social Security and Medicaid are exempt from these cuts. This is grossly unfair because the former comprised 22 percent of 2012 federal spending while the latter 23 percent. Consequently, this exemption forces 55 percent of the budget to shoulder 100 percent of the cuts. This, however, does make political sense because these programs are very popular and, while the US Congress may be insane, it isn’t crazy.

Getting back to the spending cuts, its important to recognize that they don’t actually reduce absolute spending but slow the pace of spending increases. This means that the federal government’s 2013 spending is maintained at 2012 levels and subsequent spending increases are capped at around 1.5 percent annually.

For example, the US Department of Defense’s (DoD) budget, according to the Congressional Budget Office (CBO), grew by an annual rate of 8.2 percent between 2000 and 2011. This increase was justified – understandably – by the fact that the US was fighting two wars.

However, since those wars are now either over or ending, shouldn’t the DoD’s budget also decrease? Would it also not make sense to cap that rate and tie it to the country’s economic growth rate – projected to be 2 percent in 2013 by the International Monetary Fund?

Finally, this relative reduction wouldn’t be unprecedented since the DoD’s budget was reduced by approximately 1 percent between 1990 and 1999. The fact that sequestration doesn’t actually reduce the budget in a much tougher fiscal environment should, therefore, been seen as good news by the department and its advocates.

The point here is that even though these cuts are spread disproportionately, they still aren’t as bad as most people are making them out to be. However, there is a tragedy here and that is the US Congress’ inability to do anything substantive and the impact this has on the US economy and the country’s businesses and residents. A legislature that lurches from one crisis to another without a plan costs everyone billions of dollars in inefficiencies and lost jobs.

It also hurts public sentiment, which, in an economy that depends on consumer spending, is a disaster. This uncertainty has an exponential impact on any economy that is recovering from a bruising recession. Finally, it also hurts the perception of overseas investors – this is particularly dangerous for the US since these are the individuals and groups that are buying our debt without which our economic system could well collapse.

The bottom-line is that the US does have a spending and debt crisis but it won’t be solved by a piecemeal solution that ignores a major part of the problem. Furthermore, the situation is not helped by government officials spewing hysterical panic-filled rhetoric – they should leave that to radio talk show hosts who do this on a regular basis and are quite good at it.

The solution to our fiscal problems will come from facing reality and working together to craft a comprehensive solution. Unfortunately, there is literally no one in Washington who is capable of doing that.

Therefore, wait a little longer at the security gate, accept a smaller benefit check and don’t vote for your current elected representative in the next election.