End Sequestration Now
The history of budget conclaves is, at best, discouraging. High-level negotiations set to begin tomorrow and end in six weeks aren’t likely to improve the record. That is, unless lawmakers focus on doing the one thing they all claim they want -- helping the economy grow faster.
It’s possible to accomplish this quickly, creating jobs in the process, and it comes down to two simple words: End sequestration.
The $80 billion in across-the-board cuts in discretionary spending this year (increasing to $109 billion come January and adding up to $1.2 trillion through 2021) are exactly what the economy doesn’t need right now. In August, the Congressional Budget Office said that, by canceling sequestration for the next 14 months, lawmakers could add 1 million jobs and increase gross domestic product by 0.7 percent. There can be little doubt that sequestration is doing more harm than good to the economy.
Nor can there be much doubt about the response to this line of reasoning: Yes, job creation is important, but so is deficit reduction. There are at least two answers to this argument.
One, deficit projections for the next seven years without sequestration are lower now than they were when the cuts were originally imposed. That is, if the goal of sequestration was to reduce the deficit by a certain amount by a certain date, then that goal can now be achieved without sequestration.
Sequestration has undoubtedly helped shrink the deficit, which the CBO estimates will hit $642 billion, or 3.9 percent of gross domestic product, this fiscal year. It was almost 10 percent of GDP in 2010. The red ink is expected to keep receding until it reaches just 2 percent of GDP in 2015.
Over the next decade, discretionary spending will decline to about 5 percent of GDP from just over 7 percent because of repeated rounds of cuts and, to a lesser extent, sequestration. In 2023, such spending -- which encompasses things as varied as research grants, funding for the National Park Service and Head Start, and prescription-drug approvals -- will be at its lowest level relative to output since 1962.
Two, there is a time for deficit cutting, and now is not it. The U.S. certainly needs to rein in its spending habits. But the economic case against sequestration this year and next is clear-cut. The CBO, for example, says rapid deficit reduction has harmed employment and economic growth at a time when “output is so far below its potential level that the Federal Reserve is keeping short-term interest rates near zero.”
At any rate, the deficit will grow in the medium term -- with or without a pause in sequestration. Interest rates will rebound eventually and push up payments to bondholders. More important, the pressures of an aging population, rising health-care costs and new federal subsidies for health insurance will cause mandatory spending to increase as a percentage of GDP after 2018.
And that brings up another problem with sequestration: Congress is looking for cutbacks in all the wrong places. Focusing on 5 percent of the economy means little at a time when health-care and retirement programs are mushrooming.
That has to change. Congress has several years to figure out how to tackle the real problem. For now, though, draining $109 billion from the economy is akin to using leeches. Which was about as effective for treating fevers in 19th century Europe as sequestration is for speeding economic growth today.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.