You’ve probably heard the jokes. It’s raining outside? Its the sequester! Flight got delayed at the airport? Blame the sequester! The sequester has been the subject of much speculation recently, both political and economic. Though it is inherently fun to blame all problems on the sequester, the sequester itself is just a tiny blip on our economic radar. Its political implications, however, are far more worrisome.
For all the talk in the media about the horrors that await us in post-sequester America, far less talk has been about what the sequester actually is. The sequester is a package of spending cuts that were designed to be an incentive for the Supercommittee on Deficit Reduction to find ways to reduce the deficit. You may remember the Supercommittee—it was happening all the way back in 2011. No deficit deal was reached by the end of 2011, which paved the way for the sequester’s more unpalatable spending cuts to take effect on Mar. 1, 2013.
The sequester’s cuts are split evenly between defense and domestic spending. Because the cuts were designed to be painful, it cuts programs near and dear to both parties. In addition to cutting military spending by over $40 billion, the cuts will be targeted towards Medicare, FEMA, airport security, and many other well-known agencies and programs. Even White House tours have been cancelled (though the move is largely political). In total, the cuts will amount to about $85 billion this year, and $1.2 trillion over the next 10 years.
While $1.2 trillion sounds like a lot of money to be taking out of the economy, it is actually small enough that its effect will likely be negligible. Some jobs will be lost and some benefits will be cut. But the cuts amount to about 2% of this year’s budget, and will end up being less than that over 10 years if government spending continues to accelerate. This 2% reduction in spending is not good, but it won’t be enough to cause another recession, as many politicians would like you to believe. By comparison, the Federal Reserve has injected $57 billion into the economy in the last week alone.
Additionally, the sequester comes at a time when the economy is looking better by the day. Unemployment recently fell to a 4-year low, retail spending has been rising, and other indicators point to a growing economy that will likely mute the effects of the sequester in the long run.
What should worry you about the sequester is the inability of Congress to pass meaningful legislation to promote long-term economic growth. If our politicians can’t pass small spending cuts to avoid cuts to their favorite programs, how will they be able to tackle bigger issues like entitlement spending, tax reform, high unemployment and energy policy?
If you run into your Congressman, do not waste much time complaining about how the sequester will hurt the economy. Complain about the lack of compromise and focus on the big picture in Washington.
