Let's Sequester (Or Brother Can You Spare a Nominal Dollar?)

The Super Committee is coming down the stretch, with nary an agreement in sight. It should not come as a surprise, as the very formation of the Committee was an outgrowth of the inability of Congress to reach a deal on the debt ceiling a few months back. But instead of the expected criticism the Committee is now hearing from pundits from both right and left that maybe failure is the best option. Now why would that be, and is there anything to that “advice?” I think that there very well might be.

George Will over at the Washington Post gave us a harangue on why spending is going to go up dramatically with or without a sequester:

It shows two lines. The top one charts spending, 2013-2021, without the sequester; the other shows spending with the sequester. Both lines are ascending. Both show annual spending rising from less than $4 trillion to more than $5 trillion. The space between them is so narrow that it is difficult to see that there are two lines. Without the sequester, spending will increase $1.7 trillion; with the sequester, spending will increase $1.6 trillion.

Will uses a paper from Veronique de Rugy from George Mason University to illustrate his point. I have attached the graph by de Rugy below. The argument here is over the use of “nominal dollars” by de Rugy for the purposes of analysis. First she points out that regardless of sequestration nominal spending will go up dramatically.

A further breakdown of the percentage of budget programs reveals that sequestration provides relatively small reductions in spending rates across the board. With sequestration, defense increases 18% (vs. 20%); nondefense discretionary increases 12% (vs. 14%); Medicare roughly increases at the same rate; and net interest increases 136% (vs. 152%).

She then gets to the heart of the issue, the use of “nominal dollars”.

While the sequester projections are nominal spending increases, most budget plans count them as cuts. Referring to decreases in the rate of growth of spending as “cuts” influences public perceptions about the budget. When the public hears “cut,” it thinks that spending has been significantly reduced below current levels, not that spending has increased. Thus, calling a reduced growth rate of projected spending a “cut” leads to confusion, a growing deficit, and an ever-larger burden for future generations.

On that score she is correct. It is the age old fight about what actually constitutes a cut. What is being debated in this process is a reduction in the “baseline” spending that Congress would take under CBO guidelines that exist today. That “baseline” spending increases each year as the Congress and CBO factor in inflation. So the Super-Committee is essentially arguing over how much spending should increase (in nominal dollars). Naturally it is quite fair to say that with health care inflation running in double digits that a Medicare budget in 2016 that was the same in today’s nominal dollars would in effect be a cut. So Will does not have it entirely right, but I think that it is fair to say that his argument has some merit. Giving Congress the ability to build automatic increases into discretionary accounts is likely not the best idea.

Paul Krugman over at the Times takes the opportunity to advocate for failure, and to skewer the Republicans while he is at it. Krugman prefers to slug it out with the Republicans and wait for the voters to empower one party or the other:

Eventually, one side or the other of that divide will get the kind of popular mandate it needs to resolve our long-run budget issues. Until then, attempts to strike a Grand Bargain are fundamentally destructive. If the supercommittee fails, as expected, it will be time to celebrate.

Krugman did not talk about the potential for sequestration upon failure, but he is opposed to short term spending cuts.

Back over to the Post, where E.J. Dionne from the left lays out the case for Super-Committee inaction. Dionne gets to the essential strength in the Democratic position, which is the looming expiration of the Bush tax cuts. Dionne, with help, outlines how total inaction produces deficit reduction of about $7 trillion. His position ultimately is the correct one for the Democrats. A deal now will require, for a nominal amount of revenue, the permanent extension of the Bush tax cuts for all income levels. That is just not something Democrats will accept while imposing cuts to entitlement programs. Now if the Republicans were willing to decouple the top earners from everyone else (Bush tax cuts) I think a deal might be possible. But hell will freeze over first. Based on the political interests of both parties I think it is safe to say the best you will get is an agreement to disagree. And both parties will eventually agree to ditch the sequester in 2013, as Republican hawks demand that defense spending be restored. The Democrats will happily oblige, in return for the lifting of the non-defense sequester. And spending (both “nominal” and “real”) will continue to grow unabated. And both parties will continue to rail against the deficit. Democracy in action.

Federal Spending Without & With Sequester Cuts | Mercatus.

fed-spend-without-with-sequester-data-for-web-xls_2-1

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2 Responses to Let's Sequester (Or Brother Can You Spare a Nominal Dollar?)

  1. Jules Gordon says:

    Your Honor,

    In an earlier blog entry (Super-Committee Not So Super) I made my point as to why this thing was DOD.

    Why anyone gave this failure of leadership even a minuscule chance.

    When was the last time a budget was passed? Even when the Democrats owned the 2 major branches of government, during the ObamaCare fiasco, could a budget be passed. I would call it the ultimate corruption.

    Jules

    Like

  2. Jules Gordon says:

    Your Honor,

    I shudder to think of the ways the “super committee” will lie their way out of the arriving at a conclusion.

    Jules

    Like

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