The Truth About the Sequester

The purpose of this post is not to blame the right or the left for sequestration.  There is enough blame to go around on both sides.  For a reminder of how we got to sequester, go back and read an earlier post on the topic:  How the Sequester Got Started.  The real purpose of this post is to cut through the various and sometimes conflicting views on whether or not the cuts are minor or serious.

Imagine you run a family budget and you have to cut about 2% per year from spending.  Now a little over half of the budget is tied up in house, car and insurance payments that you are not willing or able to cut.  So that 2% cut has to come from the other half of your budget, which makes it a 4% cut from that half.  Let’s say that 25% of the budget is for entertainment and recreation and the other 25% is for living expenses like food, gas and day to day items.  Keep in mind that these don’t represent an actual family budget, they are just to show a point.

Let’s say you decide to spread that 4% cut evenly over the entertainment and living expenses portions of your budget instead of cutting one part 8% and the other 0%.  Now if we just focus on the 4% cut to living expenses, imagine that you can’t cut your gas costs or your food costs for whatever reason.  So your day to day items budget has to absorb all of that 4% cut to the living expenses portion, which could amount to closer to a 12% cut in that area.  Keep in mind that you are already halfway through the year so a 12% cut is really like a 25% cut of the budget you have remaining for the year.

Take the numbers above and substitute non-discretionary spending on Social Security, Medicare, and Medicaid for your untouchable house, car and insurance payments.  Substitute Defense and non-Defense discretionary spending for you living expenses and entertainment budget (the terms don’t mean anything so don’t read into whether Defense is entertainment or living expenses).   Now you can see why it is possible to say simultaneously that these cuts only represent 1-2% of spending and cannot possibly be devastating and that they represent up to 35% of some programs and will be painful.  Statistics and numbers can be manipulated to say what you want them to say.  Although the cuts are only 1-2% of the overall budget, they were targeted at smaller portions of the budget and do not allow for flexibility in how they are implemented.  In the family scenario above, you might get by with a 25% cut in your day to day items budget.  Could you do the same with your food or gas budget?

So what does this all mean?  One, it means that both sides are partially right and partially wrong when describing the effects of the cuts.  Take Defense cuts once again.  They represent half of the sequester cuts, despite the fact that they are less than 20% of spending.  When you take into account that they cannot cut uniformed personnel pay or costs for ongoing operations you see that the DoD has to make the cuts in limited areas like training and new equipment.  Not exactly good news if something unexpected happens, like say Syria or North Korea.

This also means that if the American people are not willing to seriously look at non-discretionary entitlement spending that any future cuts will come from an increasingly smaller piece of the pie.  Entitlement spending is already over half of the US budget and along with interest on the debt, will only increase in proportion every year if no changes are made.  I have already written on entitlement programs and compared the life expectancy when the programs were created to the life expectancy now at the link here Budget.  It doesn’t take a mathematician to realize that the longer people live and the more medical care costs, the more that these programs will cost the nation.  Are we willing to say that maybe 60, 62, 65 or 67 are not the same as those age milestones were in the 1930s or 1960s?  Are we willing to make any spending cuts at all that are not tied to a game of chicken called the sequester?  If so, are we only going to make those cuts from less then one half of the budget and shrinking?

It’s the Debt, Stupid

With the sequester in the news right now, the discussion about the nation’s debt and deficits rages on.  There are some who say that the debt is not out of control and we should not worry about our increased debt.  Others feel that we must do something about our rising debt but disagree how to attack the problem.  The two political sides differ on whether increased taxes, decreased spending or some combination of the two are the correct approach.  

For those wondering whether excessive debt is a problem, the saying goes “Those Who Fail to Learn From History are Doomed to Repeat It”.  A look back at the Suez Canal crisis of 1956 is telling.

Without going into all of the details of the Suez Canal crisis, which can be explored in more detail here: http://www.economist.com/node/7218678, the event took place in 1956 at a time when global politics were changing.  Britain, France and the other countries of Western Europe were declining in influence as the U.S. and Soviet Union were emerging as the world’s only superpowers. 

When Egypt nationalized the Suez Canal, Britain risked losing vital maritime access to India.  At the risk of overly simplifying the situation, Britain, France and Israel put forces on the ground in Egypt.  The U.S. and Soviets opposed their actions but with Britain and France holding United Nations vetoes, there was not much the U.N. could do.  However, when President Eisenhower influenced the IMF to refuse loans to Britain, the British economy could not handle the economic pressure and they were forced to end their military actions.  

“America struck at Britain’s fragile economy. It refused to allow the IMF to give emergency loans to Britain unless it called off the invasion. Faced by imminent financial collapse, as the British Treasury saw it, on November 7th Eden surrendered to American demands and stopped the operation, with his troops stranded half way down the canal. The French were furious, but obliged to agree; their troops were under British command.”

Britain obviously had a substantial amount of debt from the aftermath of World War II (which they just paid off to the U.S. in 2007 , by the way).  Their reliance on other nations for loans made them vulnerable in foreign policy.  Not only did this vulnerability force them to withdraw from Egypt, it signaled the change in the balance of power from “Old Europe” to the United States that has stood to the present day.

What makes this story important now?  The U.S. now owes over $16 trillion.  Some of that debt is to countries that don’t necessarily share our interests in the world.  Imagine a potential conflict between China and Taiwan or China and Japan.  What if China tried to flex it’s muscle and claim additional territory in the Pacific or deny access to certain waterways?  What if we tried to intervene and China used our debt as leverage?  Could that mark our decline as a superpower because we could not manage our own financial situation?

Our world influence depends on our moral example, our military might, and our economic might.  Rising debt diminishes all three sources of power and risks making the U.S. less relevant on the world stage.   

 

A highly illogical argument.

Robert Reich (Sequestration Nation, and Remembering Robert Kennedy).

The article above, which you can view at the link is a prime example of an argument that does not hold up to logic.  Regardless of whether you agree with the principles, the arguments are just not sound.  The following are quotes from the article, followed by commentary:

“The austerity economics on which we’ve embarked is a cruel hoax”

• How is reducing the growth rate of spending by a small amount considered ‘austerity’?

“The trickle-down-economics, on which Republicans base their refusal even discuss closing tax loopholes for the wealthy, is a proven failure — proven because it’s been tried before, by Ronald Reagan and George W. Bush”

 

• Both parties have discussed closing tax loopholes.  The Republicans have not refused to cut them completely, they just feel that they should be closed in addition to spending cuts, not in lieu of.  Also, to compare what happened to the economy under President Reagan is not a valid argument.  That was three decades ago and things change.  A better comparison would be to look at economies now.  How are economies with high debt to GDP ratios doing now in Europe?  How are states in the US with high or low taxes doing?  Which states have lower unemployment?

“Lower-income Americans are already suffering disproportionately from high unemployment.”

 

• Not to make light of anyone’s unemployment, but this is a circular argument.  Lower income Americans have lower income because they are more unemployed.  This is the equivalent of saying “Better singers are disproportionately winning music awards”.

“Meanwhile, America has become far more unequal than it was in 1967. Then, the richest 1 percent got 9 percent of the nation’s total income and paid a top marginal tax of 78 percent (and an effective rate, after deductions and credits, of 54 percent).”

 

• Income inequality is also a function of the changing economy.  Fifty or more years ago, income was much more limited in scope by physics.  You could only produce so many things and ship them to so many people.  Now a singer can write one hit and make millions.  Internet entrepreneurs like the founder of Facebook can make billions from an idea.  We are no longer limited as much by physical constraints.  See some of Malcolm Gladwell’s concepts on this idea.

“If Robert Kennedy were alive today he’d condemn the Tea Party Republicans (and the Koch Brother billionaires who fund them) for violating the basic ideal of social justice that’s the moral foundation of this nation.”

 

• Where in the founding documents of this nation is social justice a principle?  It is about Life, Liberty and the PURSUIT of Happiness, not the guarantee of happiness..  

 

Good article that serves as a reminder of how sequestration got its start

Here’s Who Is Really to Blame for Sequestration – Molly Ball – The Atlantic.