Reuters blog archive
from Nicholas Wapshott:
Remember the sequester? When seven weeks ago the deadline to find a federal budget compromise came and went, there was much handwringing in Washington. In the event that no agreement was found there were to be cuts to public spending so severe and painful that no one would dare fail to agree. To deter Republicans from holding out, half the immediate spending savings of $85.4 billion was to be found from the defense budget, and, to ensure Democrats would work to find a deal, half from annually funded federal programs. Despite these encouragements to fiscal discipline, the March 1 deadline came and went.
For weeks the word “sequestration” was used so often that commentators and their readers grew sick of it. The headlines moved on. But quietly, without making much news, implementation is well under way and proving just as dire and destructive as advertised. It is hard to fully comprehend the impact of death by a thousand cuts and where they fall. This week the sequester broke surface when it began affecting air travel, causing long delays at airports, which is to be expected when you send 1,500 air traffic controllers home without pay. One in 10 controllers will stay at home on unpaid leave every day until October. With the vacation season looming, crowded airports full of frustrated passengers will become commonplace.
Many cuts have an impact less obvious than gumming up airports. Carnegie Mellon University in Pittsburgh, which relies upon federal sources for 86 percent of its research, is losing $7 million between now and September, while the University of Pittsburgh will lose $26 million, mostly from health research. All other research universities tell a similar story. This fiscal year the National Institutes of Health, the largest federal funding agency for many schools, like the University of Minnesota, is spending $1.5 billion less on research.
Postponing medical research sounds victimless, but it is not if you are among those helped when a new drug comes onstream. It is impossible to list those who will miss new treatments by a year or so but will continue suffering, or even die, as a consequence of the delay. More easy to picture are the thousands of cancer patients being turned away from hospitals because of the cuts. For a cancer center on Long Island, that means not administering the most expensive drugs and telling one-third of its 16,000 patients on Medicare it will no longer treat them.
from Nicholas Wapshott:
It may not feel like it, but we are closer to nuclear war than at any time since the Cuban missile crisis of 1962. The temptation to dismiss the North Korean dictator Kim Jong-un as a cartoonish figure of fun belies the real and present danger his samurai sword rattling presents. A strange time, then, for Defense Secretary Chuck Hagel to set out on the most thorough reappraisal of our defense spending since the end of Vietnam.
It is no secret that Hagel relishes the chance to slim the armed forces to a more affordable size. It is what commended him to President Barack Obama. He has already commissioned a wholesale “strategic choice and management review” of the Defense Department, which has been told to think the unthinkable in terms of cutting spending. This week, before defending his vision before the House Armed Services Committee, he offered a glimpse into what he has in mind: a slimming of the desk-bound middle management whose pay and perks cost more than the value of their contribution to the nation’s defense; a clearheaded look at the generous health and retirement benefits the nation’s military and veterans enjoy; the abandonment of expensive advanced weapons that may not be necessary; and an unsentimental assessment of the need for all of our domestic military bases.
A well known political maxim is that politicians remain in office when they bring home benefits for their constituents. Nothing proves this point more than how the sequester process protects the senior citizen entitlement programs - Medicare and Social Security - while cutting federal spending for the most economically disadvantaged Americans. One of the nation’s most prominent sell-side analysts, Natalie Cohen of Wells Fargo, thinks the effects of these cuts have big consequences, and eventually could even be socially destabilizing. From Cohen’s recent report:
Medicare is lightly touched (2 percent) and Social Security not at all. We see Congress protecting the programs that matter most to retirees while traditional anti-poverty programs, largely managed by state and local governments, are being rolled back. In all, we see a more disturbing longer-term trend away from a vision of government that assures opportunity for all citizens while protecting the poor. Over the longer term, we believe this new approach will deepen the divide between ‘haves’ and ‘have not’s’ both generationally and racially, a trend that could lead to unrest, in our view.
from Judgement Call:
Few economists preach spending cuts as a cure for high unemployment. Yet that’s exactly what Congress decided when it imposed, starting March 1, across-the-board spending cuts (the “sequester”). Despite Friday’s mildly upbeat jobs numbers, the economy remains limp, with 15 million or so unemployed individuals who want to work. Federal spending cuts won’t make their plight any better.
Congress has known for quite some time that the federal budget will turn sour in 10 to 15 years, with expected outlays far outstripping expected revenue. For complicated, if not odd, reasons, Congress now feels compelled to do what it ordinarily shuns: cut federal programs and raise taxes. That might seem politically brave and responsible. But brushed up against facts, the case for Congress taking swift action wobbles, hitting wrong targets at the wrong time.
After two days of testimony from Federal Reserve Chairman last week in which he decisively criticized Congress’ decision to slash spending arbitrarily in the middle of a fragile economic recovery, a report on money market funds from the New York Fed nails home the point.
The paper’s key finding is that, as most observers already knew, investors were a lot more worried about a break-up of the euro zone in the summer of 2011 than they were about U.S. congressional bickering over the debt ceiling.
Last week media was in a frenzy about the effects that federal spending cuts would have on states and cities under sequestration. Last Monday morning, the White House put out information including the graphic above to highlight the implications of spending cuts for the most vulnerable Americans. These are tough numbers, but there is no context provided to understand the magnitude of spending reductions.
I spent all week on Twitter trying to point out that cuts to state and local governments from the sequester would sting, but they would not chop off limbs. Media were reporting that communities would be devastated. Reports highlighted personal stories from employees who were worried about their jobs or loss of services. But almost all the frantic coverage failed to put the funding reductions for state and local governments in context. None of the coverage focused on the possibility that state governments could, and most likely would, damper or avert these cuts by finding internal efficiencies and re-prioritizing their own budgets.
Despite the Obama administration's cataclysmic warnings about the effects of $85 billion in looming spending cuts known as the "sequester," chances are the lights will not go out when they kick in this weekend. Still, the economic impact could be significant. The cutbacks might shave a half percentage point or more from an economy that is forecast to grow around 2 percent this year -- but which only mustered a 0.1 percent increase in annualized fourth quarter GDP. This, at a time when a similar austerity-driven approach has left much of Europe mired in recession.
Both the public and the markets seem to be taking Washington's latest war of words in stride. After all, people are becoming inured to the regularly scheduled fiscal crises that have become a part of the capital's landscape. But the sequester's most frightening potential consequence is much broader than its near-term economic ripples. The real danger is that, with every new episode of political theater over the budget, America's credibility as a serious, trustworthy nation is eroded. The concept of political risk, once reserved for banana republics in the developing world, is now very much alive in the United States. And that is one liberty a debtor nation cannot afford to take.
from The Edgy Optimist:
Everyday, we are treated to a new peril: Today we have sequestration, a word not much in anyone’s lexicon until recently. The mandated cuts to the federal budget, $85 billion by last count, will further stunt anemic economic growth, or so economists and the Congressional Budget Office guesstimate. The prognostications surrounding the sequester have been grim, with White House Chief of Staff Denis McDonough warning of a “devastating list of horribles,” ranging from severe travel snafus to the end of vital education programs.
In the political media, in Washington, and in the defense industry (which will see especially draconian cuts), all of this is Big News. But after months of buildup, the end-of-days drama is ending with a resounding thud. The meh reaction of financial markets of late is particularly telling (the Dow flirted with its all-time high this week). Markets are mood rings, and the mood now is one of boredom and fatigue. Even the New York Times led page 1 not with the sequester but with a studied picture of a nun saying goodbye to the retiring pope.
from The Great Debate:
The sequestration drama in Washington is less severe and intractable than you have heard. A partial solution: Block the across-the-board cut of $42.5 billion in military funds this year — the Pentagon’s portion of $85 billion due March 1 — and spread the savings over several years by tweaking military spending caps already on the books.
Because this option preserves deficit reduction without raising taxes and lets the military drawdown intelligently, a congressional majority might support it.
In three days from now, $85 billion in cuts to federal spending - known as the sequester - will go into effect. Democrats and Republicans voted on the sequester in July of 2011, and they have done very little until the past few weeks to change the composition or timing of the cuts, if they take effect. Now, after taking a week off from legislating, Obama and leaders of Congress are back to dueling on how all this will play out. As they are currently planned, cuts are across the board and don't allow adjustments for priorities.
Carney doesn't rule out, though, the President supporting a GOP flexibility bill. #Sequester.