It is now just two weeks until sequestration kicks in and automatically cuts the level of federal spending. If you were to just get your information from the main stream media, you would think that the end of the world is coming. The sequestration cuts are "disasterous" we have been told. They take a machete to the budget and lop off all manner of critical expenditures. Something must be done or the recovery will stall. That, at least, is the story line being pushed by the main stream media. Sadly, it is just not true. Let's look at the actual facts:
1) Federal spending over the Obama years has averaged just over 3.6 trillion dollars per year.
2) When the sequestration kicks in, the cuts for the next year will total 85 billion dollars or just over two percent of previous spending.
3) The Gross Domestic Product of the United States is close to 16 trillion dollars.
4) The sequestration cuts total about one half of one percent of the GDP.
5) Absent sequestration, federal spending levels are slated to rise in 2013. In other words, the 85 billion dollars of "cuts" are not really cuts at all. Rather, sequestration is basically just slowing the rise of federal spending rather than cutting the totals.
With the facts in mind, it is easy to see that sequestration will not have the terrible effect that the media stories claim. Think of it this way: beginning January first, the social security tax paid by workers across the country went up by 2%. When that happened, no one's standard of living collapsed. There were no mass evictions of families no longer able to pay their rent. We did not discover masses of newly starving folks who were left destitute by the increase in the payroll tax. Well the same thing can be said of the federal government. If it has to reduce its spending by less than 2%, it will not be left unable to function properly. All of the critical activities of the government can still be carried out. Indeed, were the Democrats in the Senate to actually pay attention to the problem, it would be easy to find areas to be cut instead of using the across the board method of the sequester.
But what about the effect on the economy, you ask. Won't that reduction in federal spending cut the GDP? The answer, however, is not a simple one. Money not spent by the federal government translates into money not taxed by the federal government. Remember, ultimately the funds that are spent have to come from somewhere. Even if they are borrowed, the must eventually be repaid. So if federal spending is cut, then there is more in the private sector which can be spent or invested there. Private spending and investment boost the GDP and may more than make up for the decline in federal spending. (I could set forth a long explanation of how that works, but for present purposes it is enough to understand that the reduction in federal spending is offset by the effect of leaving more money in the private sector.)
So, overall, sequestration will have only a minor effect on the economy and the functioning of the federal government at most. That, of course, ignores the positive effect that it will have on interest rates in the future as borrowing is reduced. In short, the arguments against sequestration based upon the "terrible" effect that the process will have no the economy and the federal government are just so much hot air.
1) Federal spending over the Obama years has averaged just over 3.6 trillion dollars per year.
2) When the sequestration kicks in, the cuts for the next year will total 85 billion dollars or just over two percent of previous spending.
3) The Gross Domestic Product of the United States is close to 16 trillion dollars.
4) The sequestration cuts total about one half of one percent of the GDP.
5) Absent sequestration, federal spending levels are slated to rise in 2013. In other words, the 85 billion dollars of "cuts" are not really cuts at all. Rather, sequestration is basically just slowing the rise of federal spending rather than cutting the totals.
With the facts in mind, it is easy to see that sequestration will not have the terrible effect that the media stories claim. Think of it this way: beginning January first, the social security tax paid by workers across the country went up by 2%. When that happened, no one's standard of living collapsed. There were no mass evictions of families no longer able to pay their rent. We did not discover masses of newly starving folks who were left destitute by the increase in the payroll tax. Well the same thing can be said of the federal government. If it has to reduce its spending by less than 2%, it will not be left unable to function properly. All of the critical activities of the government can still be carried out. Indeed, were the Democrats in the Senate to actually pay attention to the problem, it would be easy to find areas to be cut instead of using the across the board method of the sequester.
But what about the effect on the economy, you ask. Won't that reduction in federal spending cut the GDP? The answer, however, is not a simple one. Money not spent by the federal government translates into money not taxed by the federal government. Remember, ultimately the funds that are spent have to come from somewhere. Even if they are borrowed, the must eventually be repaid. So if federal spending is cut, then there is more in the private sector which can be spent or invested there. Private spending and investment boost the GDP and may more than make up for the decline in federal spending. (I could set forth a long explanation of how that works, but for present purposes it is enough to understand that the reduction in federal spending is offset by the effect of leaving more money in the private sector.)
So, overall, sequestration will have only a minor effect on the economy and the functioning of the federal government at most. That, of course, ignores the positive effect that it will have on interest rates in the future as borrowing is reduced. In short, the arguments against sequestration based upon the "terrible" effect that the process will have no the economy and the federal government are just so much hot air.
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