Sequester is skewed against the poorest citizens
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.
Last December over 2,700 institutional investors voted Cohen the first place sell-side research director and generalist analyst in Smith’s Gradings municipal analyst poll. She is considered one of the leading thinkers in muniland.
Here is more of her analysis:
Many of the discretionary programs now subject to sequester were borne of the civil rights movements of the mid-1960’s. Programs designed to alleviate poverty and create opportunity such as Title I for disadvantaged schools, Head Start, Fair Housing and the current version of low-income rental assistance are examples. Apart from sequestration, the Voting Rights Act, also borne during that era, is now subject to challenge.
Although these programs, many of them focused on areas of concentrated poverty, were developed with lofty goals, they did not stanch the economic bloodletting of the Great Recession. Dionissi Aliprantis, Kyle Fee, and Nelson Oliver of the Federal Reserve Bank of Cleveland wrote in January, 2013:
In the 1990s, the overall poverty rate was falling and the share of people living in high-poverty neighborhoods was decreasing. But in the last decade, the concentration of poverty has increased, reversing progress made in the 1990s. It is important to note that the full effects of the Great Recession are likely not fully reflected in our data, as the end period of the data in our sample is averaged over the years 2006 through 2010. We expect that as the sample window shifts forward, estimates of neighborhood poverty rates will rise, and it is possible that the concentration of poverty will continue to rise.
The largest concentration of poverty, according to the Cleveland Fed, is in the cities:
Cohen says this about the sequester cuts:
We are not advocating restoring the cuts but rather more fairly balancing them truly across-the-board (including ‘entitlements’). It is a simple truth that you cannot shrink government without affecting jobs. And you cannot tackle a growing federal deficit without reducing spending. The current approach is likely, in our view, to reinforce income disparities and lower the standard of living for populations that are under-represented in the private sector.
And then Cohen drives the point home about the social dimension:
Unrest is already evident in the most financially troubled places such as Detroit; Jefferson County, Ala., where the state has done little to help the county out of its financial crisis; and Harrisburg, Pennsylvania, where relations between the city and state are strained.
Cohen says that bondholders will not suffer losses from defaults, but governing for state and local officials will be complex:
We do not see defaults from sequestration, and only a small potential for downgraded ratings at the fringes. But, we do see a great deal of indigestion for state and local officials in the coming months.
It’s possible that the current support programs for the poor are not the most effective at eliminating poverty and supporting families. The nation should have this debate. But Cohen is advocating, and I agree, that a full on stop of funding could have unintended consequences. The nation is facing a lot of pain and it must be shared as equally as possible. Our poorest citizens cannot be expected to bear the brunt of the suffering more than other more politically entitled groups.
Harvard University: The Obama Administration’s Proposals to Address Concentrated Urban Poverty