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Let’s Sequester the Sequester

By Harry S. Margolis

According to on-line version of the Merriam-Webster Dictionary, “sequester” means to set apart or to segregate, such as sequestering a jury to protect it from outside influence. I’m not sure how this term got applied to the automatic federal budget cuts going into effect on Friday, but we may want to sequester all of the talk about it.

It seems to be commonly agreed that the automatic budget cuts will be a drag on the economy and since they only coming from the relatively small part of the federal budget that is discretionary, they do nothing to solve our long-term budget problems, which mostly stem from the high cost of Medicare combined with tens of millions of baby boomers about to become beneficiaries.

But I was surprised to learn that according to Congressional Budget Office (CBO) projections due to the sequester’s affect on the economy and the lower tax revenue that will result, it could cause budget deficits to grow.

In Fiscal Year 2013, the CBO projects the budget deficit to total $845 billion without the sequester and $887 with the sequester, growing from 5.3% go gross domestic product (GDP) to 5.5%

By FY 2018, the discrepancy grows further with the non-sequester budget deficit estimated at $535 billion and the sequester deficit at $650 billion, constituting 2.7% and 3.2%, respectively of GDP.

Ten years from now, in FY 2013 the deficits grow as more baby boomers retire and start collecting Medicare. The CBO projects a non-sequester deficit of $978 billion, equal to 3.8% of GDP and a sequester deficit of $1.12 trillion, making up 4.3% of GDP.

While the CBO is supposed to be non-partisan, those who don’t like it’s projections often don’t accept them.  Interestingly, I found these numbers in the February 19th Market Bulletin issued by J.P. Morgan Asset Management, probably not known for taking the liberal or Democratic side of the debate. It comments:

The reduction in government spending will result in significant fiscal drag, creating an additional headwind for already sluggish U.S. growth. The deal struck on New Year’s Day provided more than enough austerity for the economy to handle this year, making the imposition of additional drag at this current juncture appear both aunnecessary and somewhat dangerous.

The sequester makes neither short-term nor long-term sense. It was meant to be a gun to the head to get Congress to agree on a more reasonable solution. But they seem unable to do so. So, it looks like we’ll all drive off the cliff together.

See you at the bottom.

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