Lessons of the Sequester

By James Kwak

The automatic sequester—the across-the-board cuts to discretionary programs that President Obama said “will not happen”—happened. The reason is simple and predictable: Republicans insist that the sequester be replaced entirely by spending cuts, while Democrats insist that tax increases must be part of the bargain.

One of the more controversial positions that I have taken, on several occasions over the past two years, was that the Bush tax cuts should have been allowed to expire completely. Now we see why.

In White House Burning, Simon and I calculated that the Bush tax cuts would be worth 2.5 percent of GDP in the long term. In other words, extending the tax cuts would mean that, in order to stabilize the debt-to-GDP ratio in the long term, we would have to come up with other tax increases or spending cuts equivalent to 2.5 percent of GDP—in today’s terms, about $400 billion per year.

The problem for President Obama is that, now that most of the Bush tax cuts have been made permanent, it is simply impossible to raise taxes without Republican cooperation. That cooperation will not happen. That’s not just because John Boehner says he won’t support any tax revenue increases. It’s because Republicans in the House cannot support tax increases, or else they will be primaried from the right in 2014.

This has been the most important factor in national politics for decades. Since the expiration of a small slice of the Bush tax cuts (for the most part, those for household income above $450,000 per year) has been successfully framed as a tax increase, the Tea Party veto over “more” tax increases has only become stronger.

When it comes to the sequester, the conventional wisdom is that the parties will wait and see which side gets more blame before doing anything. But most House Republicans don’t care what the country as a whole thinks. Since they’re from safe, gerrymandered districts, they only care what local Republican activists (the kind who are influential in primary elections) think. And they don’t want higher taxes—even if the higher taxes would on people other than themselves.

This is why procedural devices like the automatic sequester—which, remember, was originally designed to force Democrats and Republicans to strike a “grand bargain” to reduce the long-term national debt—don’t work. The sequester was supposed to be so painful to both sides that they would compromise, but it’s actually not so painful to politicians who only need to listen to their base. (This is true on both sides, but more so on the Republican side because of the greater coherence and power of their base.)

So how are we going to come up with that extra $400 billion per year (or maybe $300–350 billion, since some of the Bush tax cuts did expire)? Most likely we’re not, at least not during this administration. Republicans will continue to defend the current tax structure, waiting for 2014 and hoping that a softer position on immigration, coupled with a favorable set of Senate races, will get them a Senate majority. Democrats will reject any major plan to cut long-term spending. Most likely we’ll get a couple of small bills—one that rearranges the spending cuts mandated by the sequester, another that cuts spending modestly in order to keep the government functioning past this month.

This is bad for two reasons. The first is that there are obvious things that could be done to increase tax revenues, reduce the “size” of government, and reduce the deficit that sane Democrats and Republicans should be able to agree on. The place to start is reducing tax expenditures—tax breaks that are the functional equivalent of spending programs. In White House Burning, we take aim at no fewer than eight of them, which subsidize employer-funded health care, home mortgages, state and local government borrowing, state and local government tax collections, charitable contributions, investment income, dying (through the step-up of basis), and selling your house.* These are all subsidies that distort economic choices, supposedly to promote policy goals chosen by the government.

The second reason is that it means that we’ll go into the next budget crisis with even less capacity to support Social Security, Medicare, and Medicaid. The budget situation is going to improve over the next few years as the economy recovers. But at some point there will be another recession, or a crisis (financial? military? epidemic? climate?) that requires a large increase in government spending.

When that day comes, deficits will soar and Republicans will launch yet another attack on Social Security and Medicare. One of these decades, it is going to work. The only way to prevent that outcome is to start off with a healthy base of tax revenue. But that goal, unfortunately, has faded out of sight.

* In most cases we recommend either a reduction in the tax break or its conversion into a smaller, more explicit subsidy. For details, see chapter 7.

26 responses to “Lessons of the Sequester

  1. Anonyomouse

    Not that this is an administrative nightmare, but the closer to the sun you get, the greater the chances you could get burned, and the sun is a tilting our way this month, just a sayin.

  2. Good on you.

    One quibble: the gerrymander appears to be less of a factor in the Republican hold on the House than is widely claimed. (Sorry, don’t have a cite, it’s somewhere…)

  3. I saw a CBO report released yesterday that said revenues for 2013 will be a record high of $2.7 trillion. Yet you are saying we need to raise taxes more for supposed more revenue? Our problems are not on the revenue side. They are on the spending side (defense, SS, Medicare). Defense needs to be slashed by 20-30% and SS and Medicare need to be modernized to reflect the realities of today that did not exist when they were created half a century ago. Raising taxes will not fix the problem and will most likely exacerbate it.

  4. It certainly looks like the gerrymander is alive and well in North Carolina where the Democratic House candidate got about a hundred thousand more votes but only won four out of thirteen races.

  5. Is pouring over a mountain of legal briefs crimping your style, if not your time!? “How much more could you get done if you completed all of your required reading in 1/3 or 1/5 the time? …..The below was written several years ago, so it’s worded like Ivy-Leaguer pompous-ass prose, but the results are substantial. In fact, while on an airplane in China two weeks ago, I helped…..” http://snipurl.com/26gkx52

  6. Gerrymandering is a bipartisan activity. In Colorado the Democratically controlled legislature has worked to split Republican areas amongst strongly Democratic districts — take a look at Boulder county.

  7. Chalk one up for the Pubs. They win this invented crisis hands down. Federal spending has been cut and most swing voters will not be able to detect any impact on them. I agree that the House will not be changing hands any time in the foreseeable future. Obama traded the Bush tax cuts for virtually nothing. Once the Supremes throw out the Voting Rights act you will see the permanent Tea Party majority take over, until they invade another Muslim country.

  8. its alwaus spend more with u

    Gerrymandering is done by both parties. What is your point of bringing it up here? California overspends like u propose because of it. If u can’t find 2.5% to cut, you have no imagination. Explain to me me how giving poor managers more money is ever the solution. Please bring back Simon.

  9. James, Obama got his tax increase as part of the “fiscal cliff” deal. However he wasn’t satisfied and wanted an additional tax increase when it came to the “Sequester” deal. As some folks on this post have mentioned, the country has a spending problem not a revenue problem. If we can’t cut back on our rate of spending we are in big trouble as a nation.

  10. And the tragedy of the plutocratic America continues unabated. As they say, follow the money. Wherever the money leads us is where the answer lies. In this case, we are searching for the answer to the question regarding why no sane and sensible solution to the budget may be found, either on the expenditure side or the revenue side. And, as always, the answer is simple. The money tells us that our government is owned by the wealthy, and is therefore not going to make any changes which would change the direction of the money flow. Making sensible choices, all of which are easily reached through rational thought, and we all know them, would require far more fairness in taxation, and sanity in governmental appropriations, none of which may be achieved since they would all result in a rebalancing which has the effect of reducing the amounts of money going to or being protected for the top 0.01% of us who own everything important. Literally, revolution becomes the only possible solution.

  11. Government does not have “debt,” in the sense the private sector does. See http://www.rooseveltinstitute.org/new-roosevelt/federal-budget-not-household-budget-here-s-why and http://www.rooseveltinstitute.org/new-roosevelt/deficit-nine-myths-we-can-t-afford

    That “debt” is really the private sector’s net financial asset contribution from government. Read the links for more information about this throughout our history.

    So there’s no “budget problem,” and there’s no money shortage, no end in sight to available dollars. All of that is baloney, and nothing else.

    Nevertheless, the Republicans shout to the rooftops, and through both corporate and publicly owned media that there’s a “debt” problem because of spending. As a percentage of GDP, U.S. government spending ranks 25th out of the top 30 OECD economies in the world. U.S. government is very small, relative to the size of the nation it governs. And Republicans have been desperately trying to keep it that way, by hook, crook, hostage or sequester. The Republicans are entirely responsible. Democrats are complicit.

    What remains unspoken is a disclosure that the current “debt” panic is an explicitly stated Republican strategy called “Two Santa Clauses,” authored by Supply Side “economist” (actually just a journalist) Jude Wanniski. The strategy advises Republicans to run up as big a federal “debt” as possible when they are in power, then complain bitterly about the deficit when they’re out of power. That’s exactly what is going on now.

    Implementing this strategy began with what was at the time the biggest-ever budget deficit in the Reagan administration, and continues until the present day. More recently, the U.S. entered into $3 – $7 trillion of obligations for wars in Afghanistan and Iraq, a new Medicare drug benefit, trillions in tax cuts for the rich, and an estimated $13 trillion in subsidies and bailouts for the financial sector to prop it up after its frauds crashed the economy. Where was the “debt panic” for all this stuff?

    Meanwhile, Social Security has a problem two decades hence, and states need revenue sharing desperately, yet government continues to treat these as “problems,” even as something that needs to be prepaid in taxes or reduced benefits. Even the post office must pre-pay 75 years of retiree health benefits, and so is operating at a loss and must cut Saturday service!

    Where is the request that the orders-of-magnitude larger subsidies for petroleum ($300 billion annually), the military or banksters be pre-paid? Where are their tax increases, or benefit cuts? And who is really the entitled party here, grandma and her social security, or the fat cats on Wall Street?

    I call bullshit.

  12. Robert Palmer

    I wasn’t aware that gerrymandering was exclusive to republicans. Good to know.

  13. As a citizen to the north of USA, it is amazing (?) that the USA is the most dysfunctional governance known to the world. As a previous commenter said only a revolution will make for better change. The plutocrats are driven by greed and need to hold the 99% hostage as an apartheid state within a state.

  14. Among the great ironies of this entire debate are the passage of Gramm-Rudman-Hollings by a Republican Congress in 1985 after the Reagan Administration loaded the economy with new debt at levels not seen WWII and the current refusal by Republicans to raise the debt ceiling after the Bush Administration added another whopping helping of debt to the federal plate. In the first case, Congress admitted that they couldn’t trust their Republican selves with our money and, in the second case, they claim that they can’t trust the Democrats with our money. The period from 1970 to today has been a political comedy with tragic outcomes. It is only fitting that it began with a criminal in charge, achieved momentum (due to traction with Kansans) under an actor and reached its zenith under a President who wasn’t elected by voters.

  15. GaryK,
    The size of the revenue number (projected $2.7 trillion for 2013) is not as good an indicator of revenues as revenue as a percentage of GDP. The CBO projects 2013 revenues to be 16.9% of GDP, not as high as in 2007, when revenues were 18.5% GDP.

  16. Did someone say “revolution”? Here’s how the Plutocrats handled it and intend to handle it:

    http://rt.com/usa/nypd-occupy-michael-premo-703/

    I think the Third Amendment can be used as yet another tool in the cases against fraudclosure since there is a clear connection between TBTF bankster excel sheets and how “private” mercenaries got their “spoils” of war this past decade.

    Heck, it would be no less crazy than the it’s my PRIVATE living room owners of websites like Huff and Post running themselves solely based on censorship of “comments” claiming that their First Amendment Rights are being trampled when anyone remotely related to We the People gubmint calls bullpuckies on their “news” – news which, lo and behold, did not peep about the NYPD court case when that IS news that a final judgement by the jury was issued. Instead they promote the “idea” NEWS that drones can be used against USA citizens IN USA without due process – basically because a Plutocrat orders the assassination – Holder said so…

    Hard to pretend that there isn’t already more than one “revolution” in progress…TBTF, TBTProsecute, TBT be stopped because if you are rich enough – a 1% – the defense “because I can afford to do that” is good enough as “law” – or soon will be “law”…

    Which brings us to ANOTHER Amendment for the people who can count beyond the #2 – the Sixth Amendment – a “speedy and public trial”. Drag it out now and laws are changed faster than a jury gets picked

    “because I can afford to do that”….

  17. Bruce E. Woych

    While you all are pussyfooting around with distractions:
    Jim Himes, Former Goldman Sachs Executive, Introduces Bill To Deregulate Derivatives

    The Huffington Post | By Chelsea Kiene Posted: 03/07/2013 10:35 am EST

    http://www.huffingtonpost.com/2013/03/07/jim-himes-financial-reform-derivatives_n_2827597.html?utm_hp_ref=daily-brief?utm_source=DailyBrief&utm_campaign=030713&utm_medium=email&utm_content=NewsEntry&utm_term=Daily%20Brief

    “Derivatives — which Warren Buffett has referred to as “financial weapons of mass destruction” — are viewed as a key trigger of the 2008 economic crisis.”

  18. Anonyomouse

    It’s been a while, but the Connecticut mirror?

  19. I HAVE BEEN READING YOUR E-MAILS FOR YEARS BUT HAVE NEVER RESPONDED BEFORE. I WAS PROMPTED TO WRITE THIS TIME BECAUSE I ALSO READ THIS MORNING A STRATFOR ARTICLE ABOUT HOW THE EUROPEAN UNION WAS BECOMING UNTENABLE – NOW TO THE POINT THAT RADICAL POLITICAL PARTIES ARE GAINING STRENGTH IN COUNTRIES WHERE UNEMPLOYMENT IS HIGH. THE WRITER – GEORGE FRIEDMAN – DOES NOT SEE THE POLITICAL WILL IN EUROPE TO GET THEM OUT OF THE MESS THEY ARE CREATING FOR THEMSELVES, AND EXPECTS IT WILL SIMPLY GET WORSE TILL THE NEXT CRISIS. HE DOES NOT PREDICT A NEW RISE OF 1930S STYLE FACISM, BUT STILL EXPECTS TO SEE THE RISE OF SOME KIND OF RADICAL MOVE AS RISING UNEMPLOYMENT DRIVES PEOPLE TO GREATER AND GREATER DESPERATION. FREIDMAN IS BASICALLY SOUNDING RESIGNED TO THE COMING CALAMITY THAT WILL ENGULF EUROPE AT SOME POINT IN THE NOT TOO DISTANT FUTURE
    I SENSED IN YOUR RECENT ARTICLE THE SAME RESIGNATION THAT WE ARE PAST A POINT OF NO (EASY AND LIKELY) RETURN WITH THE MAKING PERMANANT MOST OF THE BUSH TAX CUTS THAT CAUSED THE PROBLEMS WE NOW FACE, ALONG WITH SPENDING ON TWO ILL-CONCEIVED WARS. OUR COURSE IS NOW ONE THAT WILL END IN CRISIS AND DESPERATION AS WE CONTINUE TO WEAKEN OURSELVES FINANCIALLY IN THE NAME OF “FREEDOM” (YEAH, FOR THE SUPER RICH TO PILE UP MORE MONEY WHILE EVERYONE ELSE LOSES WAGES AND SECURITY.
    AMERICANS SEEM TO HAVE COMPLETEY FALLEN VICTIM TO THE PROPAGANDA MACHINE OF THE REACTIONARY TEA PARTY AND FOX NEWS, AND THE GUY THAT SHOULD BE THE LEAD SPOKESMAN FOR THE SANE COURSE, BARACK OBAMA, SEEMS ONLY TO WILLING TO CONTINUE TO COMPROMISE WITH THE PEOPLE WHO ARE DRIVING THE US TO RUIN. OF COURSE, OBAMA IS AS MUCH IN THRALL TO WALL STREET AS ANY REPUBLICAN, SO I GUESS I SHOULD NOT BE SURPRISED. THE RIGHT, EVEN THOUGH THEY WHINE AND COMPLAIN ENDLESSLY ABOUT HOW THEY HAVE BEEN UNJUSTLY INJURED BECAUSE OF OBAMA’S SO-CALLED SOCIALISM, HAVE ALREADY WON. IT IS REALLY DEPRESSING TO SEE THE US GO DOWN LIKE THIS.

  20. Let me see if I got this right..
    Bush gives the citizens some of our taxes back..A few percent here and there. And the mean gerrymandering Repubs will not cut a deal due to the Tea Party types. Lets get more taxpayer money by getting rid of their deductions.. And watch out..the mean repubs are coming after Medicare and SS next time…Of course you conclud no Dems at fault here! Is there any DNC funding for Baseline??

  21. It’s doubtful that The Base gets money from the DNC. I think moonbats helicopter it in at night.

    And Korihor, you are a prime example of why this country has so many troubling issues. You seem to be shouting at people you havn’t met yet, or are not conscious that your caps are on, or perhaps you don’t like being interrupted while you speak. Sort of a reverse hannity who can’t understand what he doesn’t understand but wants you to explain it to him nice and easy like.

  22. Annoyomouse..It was sarcasm about DNC funding? But when does the spending slowdown. It looks like never. How can we continue to borrow at a 40 out of 100 dollar pace?? When do we slow it down??
    This article sums up what is wrong with spending. The only people James has a proplem with it seems are the redneck Tea Party types who want the Federal Gov to rein in some of their spending. No country can continue to borrow at this pace ,So one day when Federal reserve decides to cut off spigot along with other factors and then what..Opps time to really pump some more money into the economy,,oops inflation goes Argentina’s way…Presto we are ok with gov debt and citizens money is worthless!!

  23. It was hard to tell there, and there is no plan to slow down spending. They had a chance in 08, but anything beyond that is baked into the cake so to speak. When it turns out that the majority was not correct in there thinking, reducing spending went the way of the dinosaurs by majority rules conduct. You have to face facts and realize that the whole place is in denial, and from that emanates a dysfunctional congress, who wants to study things to death if it’s not in there best interests. Should interest rates rise, cause that’s the only way they can go today, it will only get worse, until it gets better for a few of us who will avoid the coming executions caused from all this created insanity.

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