The next fiscal cliff

The bad economic policy in America’s next set of automatic spending cuts

February 8, 2013
February 8, 2013

On March 1, automatic budget cuts will hit the United States—a hangover from the fiscal cliff—unless the government takes some action to stop them. And while a compromise may be in the offing that cuts some less important spending and closes some tax loopholes, the deadlock between Democrats, who oppose deep immediate spending cuts, and Republicans, who oppose further tax increases, is making it look increasingly likely that the cuts—called the “sequester”—will be enacted.

The trouble is, these cuts weren’t designed to be a sensible fiscal consolidation. They were designed to be so awful that politicians would come up with a sensible one instead. The theory was that Republicans would so hate slashing $55 billion off defense spending and Democrats would so detest taking $55 billion out of an assortment of domestic programs that they would find a compromise. 

But the signs of that happening aren’t good. And if the sequester takes effect it will cut about 9% of the budget across the board, leading economists at Goldman Sachs to predict that GDP would grow half a percentage point slower than otherwise expected.

Moreover, it will hit the kinds of programs that lay the foundation for future growth, according to the White House, which is drumming up opposition to the plan by explaining how its appointees would apply the sequester if forced to do so:

Research is a good investment. But the sequester plan will cut spending on scientific research, freezing some programs, reducing the number of grants issued, and slowing the pace of the FDA’s efforts to bring its new drugs to market.

Education is a good investment. But the plan will cut investments in early childhood education for 70,000 kids, and send some 14,000 teachers to the unemployment line.

Businesses need credit to grow. But the plan would cut $540 million from the government’s plan to guarantee loans for small businesses, hurting private investment.

Exports have driven the US economy in recent years. But the plan will force the Department of Commerce to shut down a program that helps American businesses find customers abroad.

The administration says it would try to apply the sequester with as little impact as possible. That the cuts would still hit things like education and research shows how far policymaking has strayed from economic, let alone political, consensus. On Feb. 4, the Congressional Budget Office pointed out, once again, what everybody knows: The reason the US has fiscal problems isn’t because it spends too much on education or research but because its health-care costs are rising out of control and its population is getting older. But Congress isn’t focusing on those issues, nor on investments that would make the economy grow faster than the national debt.

Instead, the sequester mostly targets defense spending, an area where there is plenty of fat, but where cutting too fast could still slow growth. Worse are the impact of the domestic cuts, which make up more than a quarter of the total package. Finally, Medicare, the program most driving forecast budget deficits, has a fairly small $11.2 billion cut, and not a smart one at that.

Think of it this way: Congress knows that a smarter fiscal track requires putting a round peg in a round hole. Instead, it’s dead set on driving in a square one.

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