This was featured on MarketWatch.com on July 23, 2012 in an edited version and title
There are two important, very important, issues facing the Federal Government in the next few months. The decisions made or not made on these issues will set the direction for the country for years to come. I am not talking about the election, but the Budget Sequester and all the expiring tax provisions, both taking effect at the end of the year.
Unless Congress and the Administration act, tax rates for all taxpayers will increase next year and a host of other tax provisions will dramatically change. This is the so-called tax cliff. It is complicated and more than significant.
Also, unless Congress acts and the Administration cooperates, automatic budget reductions affecting defense and certain domestic programs will go into effect as a result of the Budget Control Act deal made last year. Due to the failure of the Super Committee to come up any agreed-upon deficit reductions as called for in the “budget deal”, the decision to make certain spending reductions was taken out of the hands of the government and put on automatic pilot to make the landing.
The impact of the expiring tax provisions is well known, as is much of the inabilities of the two political parties to even discuss their differences. Let’s leave this one aside.
The Budget Sequester is another matter. This ill-conceived policy of making ad hoc cuts over a 10-year period was the poster boy for all those wanting to kick the can down the road. Many members of Congress and the President supported it, believing it would be undone. Well, guys, careful what you vote for.
Republicans have been whining about the coming defense cuts. The Secretary of Defense alarmingly opposes them, most conservatives oppose them, and defense contractors oppose them. Economists warn about the impact of the reductions on the economy. A full-boat lobbying campaign to reverse them has been going on for months.
The $1.2 trillion budget pain caused by the sequester will hit domestic and defense spending, but the domestic side of the equation is getting lots less attention. A few groups are spreading tales of doom and gloom, human tragedy and the end of life as we know it if the reductions to Head Start, child care and AIDS programs, as well as many other domestic programs— cuts that were never supposed to happen-go into effect.
I understand all of these concerns. I also understand the federal budget is in complete disarray. The apparatus of making sound fiscal judgments is broken. The Federal government borrows roughly $4 billion a day to finance the yearly trillion dollar plus deficit, a deficit that will soon pass the $16 trillion mark. It is unsustainable and to that economic fact there is no doubt.
So, What to do? I say, let the Budget Sequester go into effect for the following reasons:
1. It is not a $ 1.2 trillion “cut” in programs over the next 10 years. It is about $50 billion next year for defense and a like amount to a few domestic programs. (But not entitlements) Ten-year projections are meaningless when Congress can change things at any time, only next year matters.
If the Pentagon exempts personnel cuts, as the law allows, and spreads top-line cuts to weapons production and readiness, the defense spending reduction in 2013 has a significantly smaller impact. It is also because the law targets money Congress authorizes, which can take several years to spend, rather than "outlays," which are government checks that have been written.
A significant amount of money to be sure, but manageable it seems to me on a short-term basis. I am not worried the country will be put in jeopardy and our considerable arsenal will collapse.
There is so much bloat, duplicate programs, fat and waste by government, this mini-Jenny Craig reduction program should barely hurt. When has any government program really ever gone away once enacted?
2. This country’s economic future and vitality cannot depend and be based on making guns, airplanes, drones, electronics and bullets. If defense cuts have the effect to right the ship then so-be-it. I am not anti-national security, but defense spending is not and should not be a national jobs program. The country simply cannot afford, nor should it, be subsidizing every interest group that pleads its case.
3. Deficit reduction has to start, has to be serious and it has to involve “painful choices”. Defense is one of those choices, Idiotic domestic programs are another and entitlements should be another. There needs to be careful recognition to help people who need help, but continuing funding the perceived needs for everyone for everything cannot go on forever with out making an incredible shift in the direction of the country.
4. The whole political process needs a jolt. Making the automatic cuts may be a catalyst to start a real process of addressing the problems.
5. The amount of the “cuts” is small in comparison to the overall federal budget and even smaller in the national macro economy. I doubt the amount of money that will not be spent will plunge us back into a recession and double-digit unemployment as the alarmist portray. If that is the case, then the economy is even in a more precarious position. Individuals will be affected, but overall it is too small to make a big adverse difference.
In any event, there are so many to blame for all of this uncertainty, an uncertainty that is taking a toll on the economy, spending decisions and confidence. The broken political process and misguided notions that government is the savior of the individual gave us all of this. As they say, plenty of blame to go around.
The number one culprit is Barack Obama. The President of the United States appears to be disengaged about all of this. He seems to only be interested in raising political cash for his campaign and denigrating Mitt Romney for being a successful businessman.
The Congress also deserves the blame for the unsavory medicine of the Sequester. Speaker Boehner (R-OH), at least, deserves some credit of trying to pass some proposals, a budget for example. However, on many of the strategic decisions on how to extradite us from the fiscal mess, its coming impact and relieve the country from all the uncertainly, he has come up short. Republicans decry the deficit, but when it comes time to do something, they run like scared rabbits.
Over in the Senate, it is barely worth commenting on the effort and performance of the one-song liberals led by Senator Harry Reid. (D-NV) Their sole focus is on raising taxes on upper income taxpayers, all the problems would be solved if they could only accomplish that dream.
This rancor and political games being played are frightening. Sometimes compromise is in order, some times not. But what is in order is a serious attempt to take up the issues, debate them and make the best decisions possible. Since that is not going to happen, then let the sequester take effect and the next bunch can sort out the mess.
The tax issues are, of course, different matters altogether.