Sequester’s rationale cut down, severe cuts remain

In 2011 President Obama signed the controversial Budget Control Act to address what was widely seen as out-of-control national debt. This legislation mandated that if lawmakers could not reach an agreement to reduce our nation’s debt by the beginning of 2013 deep, across the board spending cuts would come into effect. With a gridlocked congress and no resolution in sight, the President signed an executive order on March 1 of this year implementing these so-called ‘sequester’ cuts. The sequester calls for $85.4 billion in spending cuts this fiscal year, with an additional $87 to $92 billion in budget cuts annually through 2021, slashing federal spending by $1.2 trillion over the next decade. The cuts are split evenly between defense and non-defense programs, and will impact areas such as social services, infrastructure investments, Medicare, education programs, and job development initiatives.

The sequester was a response to the unease felt in Washington over our nation’s debt to GDP ratio. In 2012 US GDP was estimated at $15.7 trillion, compared to a national debt of $16.7 trillion as of June 15, 2013. This gives us a current debt to GDP ratio of roughly 106%. According to Carmen Reinhart and Kenneth Rogoff’s influential 2010 economic paper, Growth in a Time Of Debt, growth slows to a halt if a nations debt exceeds 90% of its GDP. Reinhart and Rogoff compiled two centuries of data and concluded that average annual growth shrinks from roughly 3% to 1.7% when this debt ceiling is reached. They provide even lower numbers, 3% to -0.1%, in the postwar period. According to economist Paul Krugman this study had a “more immediate influence on public debate than any previous paper in the history of economics”. Indeed, the Reinhart-Rogoff study was quickly seized upon by conservative lawmakers advocating for budget reduction. Paul Ryan referred to their results as “conclusive empirical evidence” when arguing for deep cuts to social services and health care.

Despite its initial popularity the Reinhart-Rogoff study has recently been proven to be far from conclusive. An April 2013 essay by University of Massachusettes Amherst grad student Thomas Herndon, co-authored by his two professors, Michael Ash, and Robert Pollin, sought to reproduce the Reinhart-Rogoff findings with publically available data. When they were unable, Herndon contacted Reinhart and Rogoff asking for access to their original spreadsheets. Amazingly, they complied. When analyzing the data, Herndon came across a significant miscalculation. Reinhart and Rogoff did not include four years’ worth of growth data from New Zealand, during which time it was above the 90% debt to GDP so-called breaking point. Fixing that error alone added 1.5% to the growth rate for countries with debt above 90% GDP, raising the average growth rate in the postwar period from -0.1% to 2.2%. This modification discredits the Reinhart-Rogoff theory. Although one may still argue high debt is not good for growth the line in the sand has been blown to the wind and the negative consequences are nowhere near the apocalyptic levels pundits and lawmakers feared.

Disproving the Reinhart-Rogoff theory has effectively stripped away the “empirical evidence” used to justify sequestration. However, the sequester remains, and the negative effects of this year’s $85.4 billion worth of budget cuts are overwhelming. In Sacramento, California, the Sacramento Housing and Redevelopment Agency provides rental assistance to low-income families. This year, they are facing a $13.9 million shortfall, which will equate to 1,700 families, or 4,800 individuals, loosing housing vouchers this July. Over 60% of these families include at least one disabled family member. Nationally, public housing support will be cut by about $1.94 billion by years end. Elsewhere, the Salt Lake City Community Action Council has been forced to close one of its food pantry’s, which feeds over 1,000 people per month. The House of Representatives is contemplating a $20 billion cut to the SNAP program, threatening the food benefits of 2 million. Education will take a hit due to $406 million being cut from the Head Start Program, denying 700,000 low-income children health and social service support designed to help them succeed in school. In West Virginia all positions with VISTA, a nationally funded service program designed to fight poverty, have been cut for the 2013-2014-service year.

The International Monetary Fund (IMF) projects that the sequester will slow economic growth half a percentage point this year, while the Congressional Budget Office believes it will result in the loss of 750,000 jobs. Unemployment compensation is getting slashed alongside employment opportunities. On March 1 The Boston Globe revealed that sequestration would lead to a roughly 11% reduction in national funding for unemployment benefits: an average of $132 less per month for recipients. In New Jersey a family that receives $611 per week will instead have $491 to cover their living expenses. Connecticut benefits have been cut from an average of $330 per week to $265. This may only be the beginning. In a written testimony at an April 16 congressional hearing Rich Hobbie, director of the National Association of State WorkForce Agencies, informed lawmakers that 11 states are considering getting rid of long-term unemployment compensation altogether to comply with sequestration cuts.

Even before the sequester, government spending, as a percentage of GDP, has been shrinking over the last two years at the fastest rate since the end of the Vietnam war. Historically, government has increased spending during recessions, making necessary investments to help the private sector get back on its feet. During our so-called “Great Recession” this has not been the case—from 2009 to 2012 federal spending has grown by 0.6%, the slowest rate since the Eisenhower Presidency. That’s hardly the sort of rampant government spending that calls for massive cuts during a time of economic hardship. Public sector employment has shrunk over 2% since the recession began. On March 9, well before most of the sequestration job cuts above had come into effect, a Wall Street Journal article made the point that federal, state, and local governments had cut nearly 750,000 jobs since June 2009. Over the same period no other sector had come close to these levels of job losses.

Unfortunately this is only the beginning. Projections about the long-term effects of the sequester are murky, however President Obama made one thing quite clear, “The longer these cuts remain in place, the greater the damage to our economy. (It is) a slow grind that will intensify with each passing day.” Obama’s sentiment was echoed by the IMF’s Managing Director Christine Lagarde, who warned that these “excessively rapid and ill-designed” spending cuts are simply too much for the still fragile US economy to bare, and that they “not only reduce growth in the short term, but they also hurt the most vulnerable.” Historical evidence points to turbulent tides on the horizon. According to the Congressional Budget Office the sequester will cause the deficit to shrink by 3.4% of the economy between 2011 and 2013. Only four times over the past hundred years has the budget shrank by more than two percent of GDP over this short a time span: during the start of Franklin Roosevelt’s second term, the period immediately following WWII, 1960-61, and 1969-70. Each time a recession followed.

Furthermore, many of the cuts being made are in areas crucial to our nation’s long-term growth. For example, The National Institutes of Health, a public agency at the forefront of medical research, is losing $1.6 billion this year alone. Dr. Elias Zerhouni, who directed the agency from 2002 to 2008, believes sequester cuts will set back medical science for an entire generation. The evidence that led lawmakers down the path to sequestration has been overturned. Unfortunately this does not appear to be leading them towards overturning the cuts themselves. Each side accuses the other of hijacking the process—President Obama and the Democrats would like to see a crackdown on tax loopholes while John Boehner and the House Republicans still believe slashing spending holds the key to solving the nations fiscal difficulties. In this polarized environment it is extremely unlikely lawmakers will reach a consensus. Yet the severity of our nations long-term economic difficulties will increase with each passing moment the sequester stays in effect. The only hope of overturning this legislation is constituents on both sides of the aisle applying severe pressure to their representatives. Even then finding a mutually agreeable solution is no walk in the park.

Jordan Beaudry has a pen in his pocket and a passion for social justice.