Sweet Sequester

Currently one of the biggest news items nationally in the USA is that of the upcoming US federal budget cuts commonly referred to as sequester. Sequestration is a product of the 2011 budget deal. Part of that bill was a requirement that a bipartisan committee come up with a plan to cut the budget. If it failed, this would trigger a series of automatic budget cuts called sequestration. The result is about a 5% cut to domestic spending and a 7% cut to our military, or about an $85 billion cut from the annual budget, or about 2.3% of total government spending.

The democrats are railing against these budget cuts because they feel it will cut essential services and harm our economy. War hawk republicans are railing against the cuts because they think it will degrade our military readiness. The resulting shrieks are being replayed in both left leaning and right leaning news outlets. The irony of this is that government (many of those same politicians in fact) voted for this outcome in the first place when they approved the new debt limit deal in 2011. At that time everyone agreed that our debt was out of hand and the 60% increase in our national debt was a disgrace ($10 trillion when Bush left office to $16 trillion today). But now that they have to take the medicine they prescribed they are whining like spoiled children. It's even funnier still because both parties sabotaged the bipartisan budget negotiations by demanding things the other side would never accept.

So the question that remains is, how bad is this for our economy? On the one hand, a government budget cut tends to go directly to GDP, just as any spending cut does (either public or private). On the other hand, we have a $15 trillion GDP, so $85 billion is 0.006% (rounded  up) of our GDP. Compare that to the $160 billion dollar Obama tax increase for the 2013 fiscal year, a tax increase Obama has sworn will not affect the economy at all. After all, these budget cuts are almost half the amount of new tax revenue. So if this tax increase (which typically decreases GDP the amount of the increase) won't affect the economy according to our dear leader, why such hew and cry about the smaller sequestration cut? Either he is lying about the tax increase, lying about the budget cuts, or he doesn't understand basic economics.

The real reason for this is obvious, and obviously partisan. Democrats love government spending and high taxes. They hate small government, low budgets and generally allowing anyone who is not living in abject poverty keeping the money they earn. Conversely, while republicans love smaller government (supposedly, I would be remiss in not pointing out that the Bush administration increased the budget and budget deficits as well) they are not generally fans of shrinking our military (or allowing the rest of the world govern themselves without being beholden to our military might).

So which side should we listen to? Neither. It's well known that budget cuts and tax hikes harm economic expansion. It is ludicrous and ludicrously partisan for either side to say otherwise. The silver lining on this whole turd sandwich (mixed metaphor, which should make it easier to understand for beltway insiders) is that neither the tax increase nor the budget cuts are actually large enough to make much difference. What we should be rooting for is stasis. Let both parties paralyze our government, let sequestration go through. It is the first real budget discipline I have seen out of government in my lifetime, which means that it likely will not survive. My hope is that once sequestration goes through and both parties pout like the spoiled children they are, we will see a more serious discussion about budget and tax reform. I doubt this will happen, but I can hope.