Spending Cuts and Politicians: Same Story, Different Chapter

Money Cut in Half“In 2011, Congress passed a law saying that if both parties couldn’t agree on a plan to reach our deficit goal, about a trillion dollars’ worth of budget cuts would automatically go into effect this year,” President Barack Obama said in his State of the Union address on Tuesday.

Collectively referred to as the sequester, the president was referring to a mechanism that would trigger $1.2 trillion in automatic spending cuts over the next nine years — $85 billion over the next seven months — that would be so obviously bad for the United States economy that it would become the common enemy that united Democrats and Republicans. The theory was that, when presented with what the president described as sudden, harsh, and arbitrary spending cuts to the defense, energy, education, and healthcare budgets, congressional leaders could buck up and come up with something better.

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But if the high-stakes season of Days of Our Lives that has been Washington over the past few months has taught Americans anything, it’s that elected officials usually shoot themselves in the foot with commitment devices, like we saw with the fiscal cliff. And now that there’s just over two weeks before the March 1 deadline, a $110 billion Democratic proposal designed to delay the spending cuts for 10 months is being treated like a political chess piece before it even makes it to a vote…

elections republicans democratsIn and of itself, political dysfunction is frustrating. The negative economic impact of indecision and awkward last-minute fiscal policy patches has become so great that serious economists are spending a tremendous amount of time studying the phenomenon. Years from now, while the U.S. is still dealing with the sequester, students will be listening to lectures about the direct and material economic cost of the eleventh-hour New Year’s tax agreement.

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Like many politicians and market participants, Senate GOP Leader Mitch McConnell, a Republican from Kentucky, recognized the negative impact of delaying a decision to the last minute, and he has urged action. Unfortunately, he doesn’t think that the Democratic proposal — the only one currently on the table, besides the sequestration itself — is feasible.

“Their whole goal here isn’t to solve the problem, it’s to have a show vote that’s designed to fail, call it a day, and wait for someone else to pick up the pieces,” he told reporters on Thursday. ”Well, my message this morning is simple: There won’t be any easy off-ramps on this one. The days of 11th hour negotiations are over. Washington Democrats may have gotten used to Republicans bailing them out of their own lack of responsibility. But those days have passed.”

Democrats, of course, disagree.

debt-posters“We have a plan, and it’s got real money,” Senator Barbara Mikulski, a Democrat from Maryland, told reporters on Thursday. “This is real money and real revenue — we’re doing revenue, we are closing loopholes — we’re reducing expenditures”

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One of the major points of contention is the same type of old-hat ideology that led to the sequestration mechanism to begin with. That is, what is the best way to reduce the deficit and put America back on a fiscally sustainable path? The answer rests somewhere in the liminal zone between spending cuts and tax reform, and each side of the aisle is not just convinced that they have the right solution, but that the other side is wrong.

Having already conceded to tax increases in the New Year’s deal, Republicans are balking at the Democratic proposal. The deal would reportedly raise new revenues by instituting the Buffet Rule, which would set a minimum tax rate of 30 percent on incomes over $1 million. The proposed distribution of spending cuts — half from defense and half from non-defense programs — is also disagreeable.

“The sequester will be in effect until there are cuts and reforms that put us on a path to balancing the budget over the next 10 years, period,” said Speaker of the House John Boehner, a Republican from Ohio. The Speaker has signaled that his party will look at any bill that makes it to his chamber, but many fiscal conservatives argue that additional revenue hikes will inhibit economic growth, and that the Democratic proposal is not a viable way to reduce the deficit.

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