Counterparties: Sequestration nation
Welcome to the Counterparties email. The sign-up page is here, itâ€™s just a matter of checking a box if youâ€™re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
The sequester, those $85 billion in automatic, immediate spending cuts scheduled to go into effect on Friday, wasnâ€™t even supposed to happen.
Instead, the sequester was included in the 2011 Budget Control Act and was only supposed to kick in if both parties failed to make a deal to cut US debt. The cuts wereÂ intended to be so â€śarbitrary and widespread that they would be unpalatable to both sidesâ€ť. Months later, weâ€™re left with no debt deal, a package of cuts nobody likes, and our nationâ€™s top lawmakers instead debating more pressing matters like who needs to â€śget off their assâ€ť.
The economic consequences of the sequester are the only part of this process that are relatively straightforward. The package of cuts could cut as much asÂ 1.25% from GDP this year, Annie Lowrey reports. TheÂ Bipartisan Policy Center says this could cost AmericaÂ 1 million jobs over the next two years. Worse,Â Ben Bernanke told Congress yesterday that the cuts will hurt growth so much, they could actually make the deficit bigger rather than smaller.
The White House, for its part, has been on a campaign to detail how these discretionary spending cuts will hurt first responders, the military, and air traffic controllers. (It’ll also hurt the zoo.) The sequester is already causingÂ immigration officials to release detained immigrants. ButÂ Phil Gramm reminds us that the US went through a similar drama in 1986: â€śThe nation survived then. It will now.â€ť
Binyamin Appelbaum has a tremendous piece today that places the sequester in historical context. The Federal government is shrinking at â€śa pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold warâ€ť. Government spending normally falls during recoveries, he notes:
But this time is different. Growth has remained sluggish and millions remain unemployed even as the federal government, riven by partisan differences, has largely turned its attention to deficit reduction.
The sequester, as a Goldman Sachs analyst told Appelbaum, isnâ€™t like other periods of government shrinkage, when cuts mostly fell on the military. These cuts are focused on discretionary spending — and donâ€™t address the biggest drivers of our debt. Itâ€™s as if Congress is trying to do its job poorly: â€śIt is cutting some of the best spending that government does,â€ť economist Tyler Cowen told Appelbaum. — Ryan McCarthy
On to todayâ€™s links: