The Sequestration Blues: Part 2 Pete Peterson Creates a Crisis

Web-caphill01-0212Ben Bernanke joined the chorus of economists concerned about the impact of the sequester on the sluggish recovery.  This is not the first time the Fed chair has commented on misguided and dysfunctional Fiscal Policy in our country.

Federal Reserve Chairman Ben Bernanke warned Congress risks slowing the economy by allowing $85 billion in automatic spending cuts to be triggered on Friday, arguing they should be replaced with more deliberate, long-term cuts.

In prepared testimony for the Senate Banking Committee, Bernanke argued the sequester would pose a “significant headwind” to the economic recovery.

 “Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” he warned.Bernanke did not offer an opinion on whether tax hikes should be included as part of a replacement bill, and he did not call for any specific entitlement reforms.

Meanwhile, the White House released reports on how the expected cuts will impact states.  This undoubtedly will trigger more Republican whining on how mean the President continues to be to them as they continue their role as economic agents of chaos.

In Kentucky, home of the Senate Republican leader, Mitch McConnell, residents woke up on Monday to news articles like these: Widespread government spending cuts that begin on Friday will cost 21,484 jobs in the state. A construction project at Fort Knox will come to a halt. Three airports may endure partial shutdowns. Nearly $12 million in grants to public schools would be cut, putting at risk the jobs of 160 teachers and aides. More than 1,000 children would lose access to Head Start.

The White House released warnings for every state on Sunday in the hope that angry voters would besiege Republican lawmakers like Mr. McConnell and the House speaker, John Boehner, to stop the $85 billion in cuts, known as a sequester. President Obama wants to replace the sequester with a mix of tax increases on the rich and less damaging spending reductions. Republicans say they won’t consider any proposal that isn’t all cuts, so the sequester is all but certain to begin this week.

SequesterThere’s a fairly good list of the types of spending items that will be subject to cuts at the Bipartisan Policy Center.

Setting aside the magnitude of the reductions, the most difficult aspect of both the defense and domestic cuts is that they will be made across the board to all non-exempt government spending regardless of programs’ merits or demerits.*** The reductions designed by law are executed at the Program, Project & Activity (PPA) level of the federal budget, sometimes defined in appropriations bills and which often includes very granular categories of expenditures, such as “two Virginia Class Submarines” or “salaries and benefits” of a particular agency.

Absent a new law passed by Congress, the president has little ability to spare one type of spending and cut more from another. This creates uncertainty in both the public and private sector because there remains much to be determined about how PPAs will be defined by agency administrators and how the cuts will be implemented. This inability to plan is already acting as a drag on economic growth.

Furthermore, the immediate and across the board nature of the cuts, along with their magnitude concentrated in a seven-month period, will impair economic growth as the year progresses. At BPC, we estimated last year that the sequester would reduce 2013 gross domestic product (GDP) growth by half a percentage point, and would cost the economy approximately one million jobs over the next two years. More recent estimates released by the CBO and Macroeconomic Advisors have roughly confirmed these projections.

Given all of this, you would think that most congress critterz would want to avoid the sequester.  However, there’s that same group of tea party crazies that are so disconnected from an evidence-based reality  it appears congress will tank the economy rather than develop a cogent Fiscal Policy related to economic theory and the state of the economy itself.

The White House strategy on the sequester was built around a familiar miscalculation about Republicans. It assumed that, in the end, they would be reasonable and negotiate a realistic alternative to indiscriminate cuts. Because the reductions hurt defense programs long held sacrosanct by Republicans, the White House thought it had leverage that would reduce the damage to the domestic programs favored by Democrats.

It turns out, though, that the defense hawks in the party are outnumbered. More Republicans seem to care about reducing spending at all costs, and the prospect of damaging vital government programs does not seem to bother them. “Fiscal questions trump defense in a way they never would have after 9/11,” Representative Tom Cole, a Republican of Oklahoma, told The Times. “But the war in Iraq is over. Troops are coming home from Afghanistan, and we want to secure the cuts.”

Cuts this draconian have no place in a tottering economy. But, realistically, the only way to break this standoff is for the cuts to exact their toll on daily life, causing Republicans to face pressure from the public to negotiate an alternative plan with higher revenues in March as part of talks to finance the government for the final six months of the fiscal year.

It’s difficult to believe that so many folks can be so misguided about the need to drastically cut the budget. Read the rest of this entry »