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The Good, the Bad, and the Sequester

February 14, 2013

Thomas Edsall has a provocative “Opinionator” post in today’s New York Times, called “On Second Thoughts.” Edsall finds a parallel between Karl Rove’s effort to curb the recent Republican tendency to nominate unelectably conservative candidates for Congress and President Obama’s push for Congress to avoid the drastic budget cuts that will occur on March 1 if no compromise deal is reached.

Edsall thinks it is revealing and ironic that the original idea for the drastic budget cuts, referred to as the “sequester,” came from the Obama Administration. He maintains that the President is having “second thoughts” on the desirability of the sequester, and implies that the President boxed himself in when he agreed to it. I submit that the facts are otherwise.

The sequester provisions were enacted as part of the Budget Control Act of 2011. The context of the Budget Control Act was the fact that the federal government was approaching the legal maximum on federal debt, after which the government would be unable to pay all of its bills. Government failure to pay its bills would constitute an unprecedented default, which would have wrecked the federal credit rating, with devastating immediate and long-term economic consequences.

Republicans in Congress were insisting on huge budget cuts as a condition for their agreement on a debt ceiling increase. Several compromises were attempted, including the famous “grand bargain” that President Obama and House Speaker John Boehner almost agreed to. On July 31, 2011, compromise was finally reached, and the House passed the Budget Control Act the next day. The Senate passed it on August 2, and the President immediately signed it into law.

The Budget Control Act provided for an immediate raise in the debt ceiling, and created a mechanism for two further increases – enough to get us through the 2012 elections. Thus a government default was avoided and an ecomonic calamity was averted. (As it was, Standard & Poor’s dropped its federal credit rating from AAA for the first time ever, in recognition of the increased risk created by the mere fact that federal debt default had become a debatable and therefore plausible prospect.)

In order to get Republican agreement, the bill had to include deficit reduction measures. The bill included $917 billion in spending cuts over 10 years, including $21 billion in the fiscal year 2012 budget. But most of the deficit reduction measures were more indirect – for instance, creation of a Congressional “super committee” to propose additional deficit reduction measures.

Probably the most important of these indirect measures were the “sequestration” provisions. If Congress did not enact a deficit reduction package worth at least $1.2 trillion, then across-the-board budget cuts would take effect automatically on January 2, 2013. Roughly speaking, half of the cuts would be taken out of defense spending and half of the cuts would be taken out of non-defense spending.

These across-the-board cuts were never intended to occur. The theory was that Republicans would be so horrified by drastic cuts in defense spending, and Democrats by drastic cuts in social spending, that both sides would be forced to agree on more surgical cuts that would do less damage to their core interests. I admit that at the time I thought the sequestration provisions were a bad deal for Democrats. I was sure that Republicans would bludgeon Democrats on the defense side of the sequester with accusations of lack of patriotism and inadequate “support for our troops.” In other words, I thought that the incentives to compromise were not equal – that the pressure on Democrats to compromise would be greater than the pressure on Republicans.

I think now that events have proven my original opinion to be wrong. Public opinion has soured on Republican economic orthodoxy, and Democrats have quite successfully juxtaposed Republicans’ unwillingness to raise taxes on billionaires with Republicans’ eagerness to cut benefits to the old, the sick and the poor. And the recklessness of the Tea Party willingness to drive the country off the fiscal cliff, and to default on the federal debt, has penetrated outward from the small circle of professional economists to the general public.

After the 2012 elections, as we approached the fiscal cliff, it turned out that the bludgeoning was done by the Democrats. On January 2, 2013, President Obama signed the American Taxpayer Relief Act, which was substantially more favorable to Democrats’ interests than to Republicans’, including about $600 billion in taxes on upper income Americans over ten years. As part of the deal, the sequester was delayed to March 1.

Now President Obama is repeating the exercise that preceded the American Taxpayer Relief Act. In other words, for Democrats, the sequester is proving to the a gift that keeps on giving. When the sequester bill was passed, Boehner famously pronounced that he had gotten “98 percent” of what he wanted. In retrospect, I wonder if it’s Boehner, not Obama, who is having second thoughts about agreeing to the sequestration scheme.

Although this is working out much better for Democrats than I had expected, it’s worth repeating that this is a terrible way to govern a country. The legal authority of the federal government to pay its lawfully incurred debts should never put in question. The mere fact that required increases in the debt ceiling have become a matter for debate undermines the full faith and credit of the United States, to our considerable economic and geopolitical disadvantage. That harm is unambiguously the Republicans’ doing.

But taking Republicans’ insistence on negotiating over debt ceiling increases as a given, I think the record shows that Democrats have capitalized effectively on the Republicans’ foolishness.

One Comment
  1. Scott Mason permalink

    One of your best articles ever. Thank you.



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