Thursday, February 28, 2013

Sequestration: A Bad Idea about to Become Law

"For which of you, intending to build a tower, does not first sit down and estimate the cost, to see whether he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who see it will begin to ridicule him, saying, ‘This fellow began to build and was not able to finish.’”
Luke 14:28-30

In his New York Times column last week David Brooks told the story of how the idea of sequestration originated. According to Bob Woodward’s book, “The Price of Politics,” the idea was introduced on July 26, 2011, when Jack Lew, who was at that time the White House budget director, visited Harry Reid’s office and told him that they had an idea to force a budget deal.

“What’s the idea?” Reid asked.

“Sequestration,” said Lew.

Then, says Brooks, “Reid folded himself over with his head between his knees, as if he were going to throw up. Then he came upright and gaped at the ceiling.” Reid told Lew that his staff had already suggested that as a last resort and he had told them, “Get the hell out of here. That’s insane. The White House surely will come up with a plan that will save the day. And you come to me with sequestration?”

The House and the Senate passed the legislation and the President signed it.

The theory was that this was an outcome so onerous that they would be forced to come up with an alternative plan to reduce the deficit.

As we now know, that didn’t work out nearly as well as they had hoped.

There are a few folks who think that the sequester will be just dandy, but most agree that it is a very bad idea. Economists say that it will slow economic growth by about a percent, which does not sound so bad until you recognize that even the growth projections, without the sequester, are between two and three percent. This makes the loss somewhere between twenty and thirty percent of the original projections. And it means many hundreds of thousands of jobs will be lost.

The common wisdom is that we need targeted cuts to reduce the deficit. The sequester is a blunt instrument; we need a scalpel. But the budget should be cut.

And the common analogy is the national budget is like your family budget. President Obama and Speaker John Boehner have both used this analogy many times, as have a host of other politicians and pundits. A family can’t spend more than its income, and the nation can’t spend more than it takes in. The fallacy in this is what economists call “the paradox of thrift.” In a family, saving money actually saves money, but in a national economy a reduction in spending by the government slows the economy, which results in slower job growth and reduced tax revenues. Spending creates demand and demand leads to growth.

Eventually the budget needs to balance (although some might argue that “eventually” should be a long time away), but in the short run, it will hurt the economy. And it will hurt real live people. And families. And communities. And the country.

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