Feb. 28 (Bloomberg) -- Even with the dire economic warnings coming from Washington, both political parties have something to gain in allowing $85 billion in automatic federal spending cuts to happen -- at least temporarily.
For President Barack Obama and Democrats, the onset of what is known as sequestration will yield real-world examples -- meatpacking plants shuttered for lack of inspectors, national parks closed, and Pentagon employee furloughs -- to back up their claims that the Republican spending-cuts-only approach to deficit reduction hurts Americans.
“There are Senate Republicans who are finally going to recognize that it’s more important to protect jobs and national security spending and important investments than it is to protect tax breaks for special interests and very wealthy people,” Representative Chris Van Hollen of Maryland, the top House Budget Committee Democrat, said in an interview.
At the same time, imposition of the cuts will allow Republicans to demonstrate their commitment to reducing spending and opposing tax increases, while also giving them a first installment in what could ultimately be $1.2 trillion in cuts over nine years.
Sequestration is “a terrible instrument, but it’s better than not cutting at all,” Oklahoma Republican Senator Tom Coburn said in an interview. “The country has an advantage if we cut $1.2 trillion out of the next 10 years.”
And both sides are betting that the start of this year’s $85 billion in reductions will improve their bargaining position in upcoming battles over funding the government past the March 27 expiration of the current budget authority and in raising the federal debt limit, which must be done in May.
That helps explain why Obama and the Republicans have yet to engage in any real haggling to avoid them.
“It helps both parties to a certain extent, because neither side will have had to give in to the other,” said Stan Collender, a former Democratic congressional budget analyst and now a partner at Qorvis Communications, a Washington-based communications firm.
The president has summoned the top four congressional leaders to the White House for a meeting tomorrow to discuss the cuts. His administration said yesterday that Obama wouldn’t act to impose them until 11:59 p.m. that night -- a public show of his determination to search for a compromise until the very last moment.
While the leaders wrangle over the budget, investors have signaled they aren’t concerned about the effect of cuts on the world’s largest economy. The Dow Jones Industrial Average reached its highest level since October 2007, adding 175.24 points, or 1.3 percent, to 14,075.37 at the market’s close yesterday. The Standard & Poor’s 500 Index rose 1.3 percent to 1,515.99.
Treasury 10-year notes fell for a second day. The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.90 percent at 5 p.m. New York time yesterday, according to Bloomberg Bond Trader prices.
Senate leaders today are working to schedule votes on each party’s alternative plan to sequestration. Neither proposal is expected to advance.
Democrats are seeking to replace this year’s allocation of the reductions with a smaller defense-spending cut, a halt in direct payments to farmers, and a tax increase that would impose a minimum 30 percent rate on top earners, known as the Buffett Rule. It would apply fully to annual income exceeding $5 million.
Senate Republicans offered a bill that would keep the spending cuts, while allowing Obama to submit his own plan by March 15 for allocating them. The measure would let Congress vote within a week to reject the president’s plan and keep the original, across-the-board cuts in place. Some Senate Republicans say such a plan would cede too much power to Obama.
In reality, though, both sides get more leverage by letting the debate linger and the cuts take hold for a while.
The White House points to polls showing the public backs the president’s position on deficit reduction and would blame Republicans for any deleterious effects of spending cuts.
“Democrats that I talked to felt that they were in a good position to deal with this, and that Republicans were not in a good position,” said Collender, who briefed House Democrats privately on Capitol Hill this week. “There was no rush to come up with a sequestration-prevention solution, and even though they weren’t looking forward to the spending cuts or the economic impact by any means, they felt that rushing into a deal would be worse in the long term than waiting.”
Some Republicans agree that Obama stands to reap the biggest immediate political benefit from the lack of a deal.
“The way it looks now, it’s the Republicans that get blamed,” Republican Representative Peter King of New York said at a Bloomberg Breakfast yesterday in Washington.
Still, allowing the cuts to kick in could be just what’s needed to yield a compromise, he added. “If you had a president who wants a deal and a political leadership that wants a deal,” in Congress, King said, “this is an opportunity.”
Obama’s political advantage could diminish once the full impact of the reductions is clear, said Republican Senator John McCain of Arizona.
“It’s pretty clear from polling data that the president has the support of more people, but in the long term, I think if there’s damage to our national security there could be a real cost to him,” said McCain, who discussed the subject in a Feb. 26 White House meeting with Obama, Vice President Joe Biden and Republican Senator Lindsey Graham of South Carolina.
The reductions, which will take effect gradually, would trim growth by 0.5 percentage point this year and eliminate 350,000 jobs if they are enacted tomorrow and remain in place through December, according to the median forecast of 26 economists surveyed by Bloomberg last week.
Republicans see support for their position in public polls, as well. While Americans are opposed to across-the-board cuts, they still want spending reductions. And, once the sequester happens, the government’s statutory spending limits will be reduced across the board, providing Republicans with a more favorable negotiating position.
“Doing nothing is on their side,” said Douglas Holtz-Eakin, a former Congressional Budget Office director and economic adviser to McCain’s 2008 presidential bid. “The thing Republicans want is to reduce spending -- doing nothing in this case reduces spending.”
What’s more, Republicans who were forced to accept tax increases as part of a New Year’s Day deal to avert the last budget crisis now need a way to demonstrate to their anti-spending Tea Party backers that they are serious about reductions.
“The Republicans have got to show that they’re willing to do some cuts, because everything has been either illusory or revenue-raising,” said former Republican Congressman Tom Davis of Virginia, the director of federal affairs at Deloitte Consulting LLP. “This is the best fight to pick,” Davis said. “You have to pick it somewhere if you want to demonstrate that you’re serious.”
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