The Sequester: Horrendous politics that will cause a recession

In a few days the US will be hit by the Sequester. All things considered, if you simply looked at 4th quarter economic results for the US the sequester will probably cause a recession in the US economy.

Initial estimates for 4th quarter GDP were down 0.1%; the first quarter of negative growth since the recession was broken in mid 2009. Subsequent revisions to GDP analysis (available in a few days) might adjust the initial analysis, but if any one thing caused the downward economic growth in the 4th quarter of 2012 it was a huge drop in government spending, primarily in military spending.

A breakdown and discussion of GDP from the 4th quarter is provided: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Of note only 3 areas really saw significant downward economic movement: One was downward movement in private inventory investment. That term "private inventory investment" essentially measures a change in a simple formula: growth in inventory development less sales of inventory. If sales are strong..."private inventory investment" could show negative growth.

A second area of negative growth was exports. Could be a reaction to world wide slowdowns, especially in Europe.

By far the largest drop in economic activity was an enormous cut in govt spending...primarily fed govt spending...and much of it was in the military and much of it was anticipating the sequester.

Now it is about to hit.

Anyone who believes that the economics of the sequester is probably going to be beneficial also probably believes in the tooth fairy. The tea party arguments for it are totally untested pure theory and a relic of ancient economics.

The clearest picture of the impact of this huge cut in govt spending occurred in the 4th quarter 2012. If anything it will cut incomes, cut jobs, and could reverse the last 13 quarters of slow but positive GDP. (13 straight positive growth GDP quarters up till 4th quarter 2012).

the cuts in the sequester are like a MEAT CLEAVER...across the board without rhyme or reason. They will slash all kinds of things, expenditures and programs, regardless of value.

The feds are warning of things like airport and flight delays. We have postponed the multibillion dollar revamp of one of the few aircraft carriers in the naval fleet. All sorts of cuts should occur. Jobs and incomes will be cut. It will probably work its way across the economy slowly with the most severe hits occurring in certain areas more dependent on govt spending. Where ever there are military bases and military spending there will be hits. (for the matter of transparency I live in one of those areas) but the hits will be widespread across the nation. For instance parts of Texas will take a beating as it has huge army bases with tons of civilian workers who will be hit.

Its frankly still one more testimony of the incompetence of the current government and particularly of the partisan character of congress wherein no agreements can be made, no negotiations ever involve widespread horse trading between parties.

With regard to the sequestration there simply has been no effort to negotiate a compromise with more limited and smarter cuts.

If you see a downturn in the economy look toward the teaparty. They love the idea of sequestration.

 

I actually am not so upset at sequestration. The government, in all areas, just keeps growing and growing, and sequester just takes a chunk of the top of it all. If anything is truly important it is a simple thing to pass a bill to restore its funds. But by cutting it all, then all things are not maintained at current levels just as a matter of course. I think, and the lack of real cutting of the government over the years shows, that this may in fact be the only way to really trim spending.

The sad part is that the only way to 'avoid' sequester is to enact other spending cuts which the inept Congress cannot seem to do and I have to assume as soon as sequester is done, they can simply vote to restore all of the cuts anyway (they just cant say that now), which knowing Congress they will probably do.

In other words they will find a way to even fuck up the savings forced on them by sequester. I put nothing past these fools.

Personally, I would like to see sequester happen and then Congress move quickly to restore those things that should not have been cut. I think it will be easier to add what is needed than to cut what is not, and that being the only difference between what will happen after sequester and what is not happening now.

 

It would seem Wall St. agrees with you, even if Bernanke doesn't. Granted, there are going to be a LOT of games played with the sequester cuts. Quite likely, they will start throwing women and children over the bow before the heavy deck furniture, in an effort to get an emergency session of congress to block the cuts. The truth is, Wall St. has already priced in the cuts, as has the military. The number of people effected will not have the dramatic effect on the economy the calamity howlers are claiming, though we will likely see a brief lack of growth as we absorb those people.

I also agree that it would have been much better to use a scalpel rather than a meat cleaver for these cuts, but that would have required compromise, not exactly our President's area of specialty.

An interesting side note. The rating's agencies had this to say about Obama's willingness to ignore the debt he has incurred:

 

well I'm sort of at the same point as browntown and onation. I too would like to see cuts, but by a scalpel rather than a meat cleaver. Although scalpel and meat cleaver are simple words that don't really reflect making hard educated decisions versus mindless 15% cuts across the board.

o-nation, of course wants to blame obama, as always.

The hard thing is that the previous congress was the most contrary least productive congress ever and it was dominated by a GOP group in the house dedicated to immature "my way or the highway" negotiations. That of course meant no negotiations. Its what got us to this sequestration in the first place.

We'll see if congress can work agreements this time around. Meanwhile, O-nation no matter how you spin this for the tea party cult figures the American public again and again and again continues to recognize that the GOP is at fault every single time they pull one of these stupid (block govt., block govt payments, block everything games) ever since Newt Gingrich organized the first one in the 90's.

 

And you and Browntwn apparently blame congress. We will simply have to agree to disagree. I do know this. Compromise takes two sides, so failure to compromise can never be accurately blamed on one side only. Given that Obama, as one man, makes up one whole side, by definition a lot more blame must fall on his shoulders than any individual congressman. Besides, isn't he supposed to be the leader?

Keep beating that drum. 2014 mid terms are just around the corner, and Obama isn't on the ticket. Democrat's sphincters should be tightening if they had any common sense. I know the many Democratic Senators in red states who are up for reelection are feeling it.


Here are a few facts to mull over. 1) The only reason we have cuts at all to an ever expanding Federal government, cuts that you, Browntwn, I, and much of the population support, is due to Tea Party "Hostage Taking". 2) By the president's own admission, the sequester was his idea of a solution to the "hostage crisis". Own it. Be proud of it. Put it on your campaign literature. The American people support it.

If the man quit demonizing his own ideas as wrong headed, and attributing them to congress, he would be surprised at how much easier compromise would be to obtain. Too bad he is such a dumb ass loser, he can't recognize such a basic principal of leadership. The man is pathetic.

 

The sequester is the result of a failure to take a scalpel to the federal budget. Congress had a chance, and this is the punishment for not coming together. Both sides share the blame. It seems as though Congress never has a consequence. They can always pass extensions if they don't work an issue out. They temporarily push it down the road for us to worry about later. I say it's time that stop that BS. Abide by the original deal that both sides approved. If it costs the economy, hopefully lesson learned by Congress and the President.

Obama is using this sequester to campaign for the Democrats against the GOP. Any kind of economic downturn will reflect ultimately on Democrats which is why the stakes are higher for them. The media is helping him out by advertising the sequester as some kind of end of the world event. Anything to pressure Republicans to go easy on them. They cannot have this happen. The GOP is using this to get the kind of real cuts we should have passed in the first place. In the end both sides are against these cuts, it's just a matter of whether the Dems would rather harm the economy or make some real cuts.

This even sheds a little light on the future of our country. If Congress and the President can't agree to cut anything, how can we possibly dig ourselves out of debt?

 

Getting congress to come together is like herding cats. Reagan and Clinton got them to agree through charisma, communication, and leadership. George W. Bush used crisis and pork.

The left blames Obama's inability to herd those cats on racism against a black president, completely forgetting about the failed white presidents of yesteryear. Too bad Jimmy Carter wasn't black, or the history books might have much nicer things to say about him.

 

Mitch McConnell had a pretty good point:

 

Point #1 is that nobody knows how the sequester will impact the economy. Anyone who makes a definitive claim such as Mitch McConnell without ANY facts whatsoever is purely voicing opinions that are factless and meritless...and obviously represent an entirely political perspective.

Point #2. I referenced the economic results of the 4th quarter 2012. The singular dramatic impact that pushed GDP downward was a dramatic cut in govt spending.

That is what I fear. Will it turn the economy backwards as it did in 4th quarter 2012 following 13 consecutive quarters of GDP growth? I don't know.....but those are hard recent facts. We'll see.

If it does have that effect it will be one more black mark against a radical ineffective congress. We'll see.

Point #3. As Browntown suggested, Congress may, post sequester, revoke some of the cuts in light of fears that such large cuts will push the economy downward. Again we'll see.

Point #4. During the last presidential campaign, in direct response to questions about severe cuts on govt spending, Romney suggested he wouldn't immediately make them, being conscience of the negative impact such severe cuts could have on overall economic development of the US economy.

We don't have a thriving fast growing economy. We have been recovering slowly from the ravages of the vast recession that hit starting 4th quarter 2007. Hiring rates have been slow, and overall growth has been weak. The folks who took the worst hits are at the middle to lower ends of income. Small businesses took hits. Frankly big corporations fired a ton of people and quickly started experiencing combinations of record profits and cash. Nobody blamed the big corporations for not rehiring full time people. Nobody forces them to do so and nobody is going to do that if unemployment jumps up as a result of the sequester. Again we will see.

If the economy turns downward, then I'd take a severe look at Tea party economics. Its all theory, no real practice or experience and to date most of its claims don't seem to work.

Now we are stepping into teaparty economic theory. Good luck America!!!! 4th quarter economic results, the best recent data available doesn't seem to suggest promising results.

 

The meat cleaver is the only POLITICALLY viable option. Remember, politicians get power by spending money. Cutting programs with a scalpel gets you angry voters, who want to vote out whoever (whomever?) cut their cushy money supply. A meat cleaver says "hey, it's across the board, don't blame me". Share the blame.

It's the corporate equivalent of having a dozen signatures required for approval of a new product. Share the blame. If everyone's involved, no single person can be blamed except maybe whomever (whoever?) is in charge.

Isn't Obama the guy IN CHARGE?

I agree - despite the Democrats running both houses, the 2009-2010 Congress was the most contrary least productive congress ever. Despite record spending and passing health care, the 111th Congress had little positive effect on the country.

 

From the research I have done, the $85 billion number for fiscal year 2013 is not accurate. That number refers to the budget authority and is meant to be spent over several years. The CBO estimates that spending will only fall by $44 billion in this fiscal year. And to be even more accurate, these cuts are not actually cuts, but a decrease in the increase of the budget over the next 10 years. With the CBO number, that is less than 1% of the federal budget.

I don't think anyone, even those radical tea partiers, would have implemented cuts in this fashion. The sequester was meant to scare congress into acting. They failed, and now we are here. The core of tea party economics is to effectively lower taxes across the board and take some of the regulatory burden off of large and small business. Many private companies are having a tough time dealing with Obamacare for example. Some even laying off workers to comply with the cost. We know their profits are good, but why aren't they hiring? My opinion is because they are unsure of the future. Obama is pushing for more tax increases, Obamacare is going into full effect in a year, and who knows what future regulations he has planned. They want to build their reserves because they are scared about the future and want to be prepared. Until we open up a more business friendly and stable environment I think you will continue to see cautious corporations and small businesses.

 

Perhaps not cuts without direction, but even if the cuts were a straight 2.x% cut of actual spending, lets put things in perspective.

According to the Washington Post Obama's federal budget has grown the federal budget from $2.98 trillion in 2009 to 3.72 Trillion this year, a 24% increase over four years. If our government can lump down a 1/4 increase in size over four years, it can lump down a 2% decrease in one year. It's idiotic. But as you pointed out, the idea the sequester is actually reducing real spending in Washington from current levels is complete B.S.

 

You mean, trying to bully the other side in to agreeing with you isn't a quality of leadership?

 

Apparently, Obama doesn't like when journalists tell the truth to the public: http://news.msn.com/politics/bob-woodward-says-white-house-told-him-he-would-regret-criticism

Really I don't care who's idea sequestration was. The fact is, both sides agreed to it, and both failed to come up with the cuts to stop it. So both are to blame here. The fact that Obama is going around the country campaigning against the GOP for something that came from his administration is disappointing. It proves his lack of leadership and willingness to at least sit down and negotiate a deal. His next scheduled meeting is Friday, too late for a deal because the cuts kick in that day.

 

Its quite interesting. The tea partiers in this forum, who have been screaming about cutting government spending are right now hemming and hawing about government spending cuts.

One thing that could occur as a result of the sequestration is backwards economic movement into a recession.

Just updated better statistics released today by the BEA (bureau of economic analysis) revise 4th quarter gdp up 0.1% rather than down 0.1% from the previous quarter (adjustments are ALWAYS made).

Still that was the lowest slowest economic growth of the last 14 straight quarters. The meager results were a result of significant cuts in government spending.

All of a sudden tea party screamers for govt spending cuts are revising their commentary. It wouldn't feel good to be pointed to as the sole cause for the return to a recession. Yet that is the most likely result should the cuts be significant.

Govt spending is being cut. Govt hiring is on hold. Total govt employment is down significantly since the recession started. Govt spending as a percentage of the GDP naturally expanded during the meat of the recession as it always does when the private markets go sour. Govt spending as a percentage of total GDP has been dropping steadily in tune with the slow but steady growth of GDP.

There is simply no precedent for the full scale and scope of the cuts that sequestration suggest. It is a function of the complete unwillingness of the teaparty infused House that absolutely refused to join in governance of the United States over the last two years, and is probably the single biggest threat to continued economic growth.

We will see what occurs. If the economy goes south a lot of fingers will point to all the teapartiers that have been screaming cut cut cut for the last several years.

 

The economy has been running in place for the last 4 years. At the current pace, the unemployment rate will not get lower. While it is true that increasing government spending can temporarily create jobs and make the numbers appear better, the reality is that we are in rough shape. Obama needs to start focusing on the private sector and how he is going to convince business to stop hoarding their cash and start hiring. Instead he is proposing to increase minimum wage, Obamacare is being fully implemented, and who knows what kinds of regulations he has in store for the future.


If we are going to get serious about the debt, it's time to get serious about spending cuts. Naturally it will slow growth. And in Obama's economy, which is barely crawling along, it is enough of a shock to send us backwards. If it happens it happens. The democrats are to blame. All they had to do was agree on how to cut 1 trillion out of the debt and they couldn't do it. They couldn't find ways to control spending cuts back then, and they will pay the price now. Both parties agreed to that, and the idea comes from the white house. Democrats are going to suffer huge losses in 2014 if they continue to ignore the economy.

 

Pure comedy right here:

 

I would LOVE/LUV/BE tremendously happy seeing the debt levels cut. I say that as an experienced business person. I spent about 2 decades in the world of commercial real estate. Lived through one industry depression...not a recession where DEBT simply crushed the industry.

Some on the far left are saying...hey we are okay now. Its under the realization that some indicators are suggesting that US debt to overall economic conditions are reverting to more normal indices. Chief among them are that the US fed govt proportion of overall GDP is dropping from its highs in the midst of the ravages of 2008 and 2009...at about 25% to lower levels that will probably hit about 20% of GDP if they haven't already. 20% is about where the US fed spending has been against total US output for most of the last several decades.

An operating business that uses debt, generally finds acceptable levels that work...something like that 20% rate.

But I don't buy into that...strictly based on experience. The explosion of debt through the entire decade of the 2000's and then as a result of the recession drove total debt to dangerous highs.

Now here is the kicker and problem. here is the lead in. When everything is going okay...revenues are working, expenses are in line...entities of any kind can live with debt. That is how people buy homes with mortgages, finance auto's, take out CC debt and take on other debt. When income is coming in ...a family, a business, and a nation can live with debt.

But when the sh!t hits the fan and things turn bad and income isn't coming in...then debt turns ugly. If you aren't bringing in income as an individual, family, business or govt, you still have that ugly debt.

The great saying from real estate is that debt never sleeps.

The US ran up huge debt in the previous decade, brutally in the recession when govt income plummeted, and currently. We have a basic level of govt expenses that outpaces govt income. So debt grows.

On top of which....and here is where I'm convinced the debt needs to be shed....the overall debt to income level is Just too friggin high. On top of that 2 big areas of govt expenses stick out: money for health care (a lot of that is old age) and money for military. (we spend roughly what the rest of the world spends in aggregate. One way to look at defense spending is we paid for Europe's defense from Russia in the 1950's, 60's, 70's, 80's, in the 90's,(after the USSR imploded) the 2000's and now...and they didn't carry the burden we did. Meanwhile their populations got govt health insurance and we didn't.

On health care people are living longer and medicare is simply going to blow all expenses out of the water over time. Of course you recall Bush and the Republicans added a huge drug program to medicare, none of it paid for, simply adding to the long term debt problems.

Now traditionally dems want to see programs like medicare fully funded to the gills and the GOP wants to see defense fully funded to the gills (excepting your Ron Paul (whacko's).

The two parties will not and cannot make a deal these days. Frankly, over the first several years of his administration Obama kept making entreaties for compromises. It never took. Traditionally congress was always able to bite the bullet and make compromises on spending to take on serious debt issues. Compromise when facing serious spending debt issues always ensued. It actually occurred while Reagan was in office, occurred with Bush I, and occurred with Clinton. It clearly hasn't occurred while Obama has been in office.

(I and most of the nation (by most polls, most votes, the recent election, etc etc etc) point the finger of blame on the radical right wing currently in office)). But I'd suggest both sides are at high levels of partisanship and serious deal making is highly unlikely.

I'd like to see serious whacks on the 2 big issues that stick out and will simply increase debt: medicare and defense. If they could take serious whacks on those two issues, the current high debt levels would more seriously drop. then the next time a crisis hit, we wouldn't be dealing from such a level of weakness...as we faced when this recession hit with such serious levels of debt in place.

So I'd like to see both sides take hits on the two biggest expense items.

OTOH: There is room for further tax increases. This is not 1980. At that time marginal tax rates on highest income folks was 70%. It isn't 1963 either when marginal tax rates on highest earners was 91%

Here is an interesting thing about those enormous marginal tax rates on the wealthiest of the wealthy during the latter 1940's, 50's and into the early 1960's. All the wealthy families that had huge wealth....KEPT it. They kept getting richer. Wealthy families don't lose their wealth through taxes...they lose it by blowing it.

Paris Hilton doesn't have lots of money because of the stupid crap she does. She inherited it from a family that has been wealthy for decades after her great grandfather built the Hilton Hotel Chain starting it in 1919. Decades before she was born her great grandfather, and grandfather accumulated tons of money even as marginal tax rates on their income hit the 91% level for many many many years. There are and will continue to be extraordinary ways to shelter wealth.

Going back to the 1950's and 1960's those were incredible years for overall American economic wealth. The US economy grew like crazy internally and additionally the US was sort of the producer for the world in a way that China is today. Enormous volumes of US wealth were created....and really really high tax rates did nothing to stop it. All the theory about taxes from right wing spinners is bogus for today's economy. People don't like paying taxes...but all the right wing theory behind it is pure bogus bullsh!t. Economic opportunity and growth create wealth....and high taxes don't stymie it. If you don't believe that explain the growth of the US economy from post WWII through about 1970 with those friggin high taxes.

now I'd like to see the parties tackle the two big expense issues and raise taxes in certain levels by negotiating in a serious way, something that has not occurred since the tea party faction and its arm twisting lobbyists from the far right wing are scoring them on being uber conservative.

hitting expenses hard and hitting new tax levels is exactly where the debt commission came down. there were actually two sets of similar suggestions: Domenici-Rivlin and Simpson-Bowles.

The problem is the parties are too busy being political and get agree. If anything one saw how bad it is w/ the GOP side when Bohner was working a deal with Obama on the fiscal cliff issue.

Obama had caved (against congressional dems) in giving in on some health care issues, cutting some costs. Boehner was so sure he couldn't get ANY tax increase on upper income folks....he moved from the Presidents proposal on raising taxes on taxable incomes above $250 k/// or possibly already at the $400 taxable rate level at that point.

He made his proposal to the GOP only majority in the house to offer a deal that would take those health care cost cuts and wrapped it in w/ a proposal to agree to tax increases on taxable incomes above $1 million...and the GOP majority wouldn't bite. That is the definition of stubborn intransigence.

So long piece above. My hope is that the potential problems with this sequester are mitigated in a way Browntown suggested toward the top of the thread...as some cooler heads prevail and some of the meat cleaver cuts are negated by subsequent legislation.

 

Nice book Earl. Too long to read, so I just looked for the small easy words I'm used to from my daily Dr. Suess. This part caught my eye.

So what you are saying is we need another world war that decimates the populations, industrial capacity, and economy of practically every country in the world except the US so we can enjoy the post WWII prosperity again? You should pitch that on change.org. I'll write the proposal if you post it.

 

**yawn......**