Yet again our nation faces a manufactured government crisis that threatens income, employment and the health of our economy. Sequestration, $85 billion in federal budget cuts set to strike on Friday, will eat into the fragile economic recovery of the past four years.
Immediately after the Great Recession, there was a burst of smart economics: bailouts, a stimulus package and significant financial reform. However, since the January 2010 election of Scott Brown in Massachusetts ended the Democrats filibuster-proof majority in the Senate, there has been almost no action – only the Affordable Care Act, which was pushed through reconciliation, and the Dodd-Frank financial reforms. Whereas the Democrats had been focused on rebuilding an economy devastated by Wall Street recklessness and government deregulation, the GOP has focused on deficit reduction through spending cuts (i.e. shrinking government) alone. This manufactured crisis is the latest example of brinksmanship, irresponsibility and foolishness on Capitol Hill.
The last thing our economy needs is a government spending cut. In simplistic terms, macroeconomics dictates that gross domestic product (GDP) is a combination of consumption, government spending, investment, exports and imports. January’s payroll tax increase has cut into consumption and private investment is struggling through a liquidity trap, so cutting government spending will only exacerbate the problems in our economy. Exports are rising and imports have been falling, but that trend is not enough to stem the tide of sequestration. Increasing the nation’s GDP is essential to getting more people in solid jobs that can support families across the United States. More people in better jobs means higher tax revenues, increased consumption and, therefore, even more job growth.
Reducing unemployment is the only tried and true way we can reduce the deficit and pay down the debt. Deficit hawks on both sides of the aisle know that federal revenues are at historic lows. In our times of budget surplus and strong economic growth, tax revenues have been around 20 percent of GDP, according to the Tax Policy Center. In recent years, taxes have averaged closer to 15 percent of GDP, and, thanks to the fiscal cliff deal (another manufactured crisis) FY 2013 taxes will increase to around 17 percent of GDP, hundreds of billions of dollars short of a balanced budget.
But this is not the time for tax increases nor is it the time for spending cuts. As we have seen in Europe, the conservative austerity policies of raising taxes and cutting spending have crushed economies. The United Kingdom has had a less than robust recovery and has seen five quarters of a shrinking economy during the supposed “recovery,” according to BBC News. Last Friday, credit rating agency Moody’s downgraded Britain from the perfect AAA rating inciting a message from Conservative Party Chancellor of the Exchequer George Osborne that austerity programs will continue through 2018. No one ever wants to talk about austerity in Greece, and, in Spain, the unemployment rate is a staggering 26 percent.
According to the Huffington Post, sequestration is estimated to cut 1.25 percent from second quarter GDP growth, 0.5 percent from annual GDP growth and could cost as many as 700,000 jobs through 2014. That is the last thing this country needs and is the opposite of the GOP’s anti-Obama election campaign message.
The Commonwealth of Massachusetts stands to lose $13.9 million in elementary and secondary education funding and $13.4 million in education funding for students with disabilities, putting 350 jobs at risk. The Commonwealth will lose $4 million in clean air and water funding, $787,000 in job search assistance, $625,000 in public health funding, and $1.7 million in funding to fight against drug abuse. Cuts will take $43.4 million from civilian defense employees and $13 million in military bases in the state. Five hundred disadvantaged families will lose childcare and 1,100 will lose access to the Pre-K program Head Start. On college campuses around the Commonwealth, 580 low-income students will lose financial aid and 800 fewer students will be employed in work-study positions.
This is bad for our state, cities, and towns.
Former Republican Congressman and now Obama administration Transportation Secretary Ray LaHood said that the sequester will take a $600 million “meat ax” to the Federal Aviation Administration (FAA) budget, according to Politico. He warned that the cuts would cause a “calamity” for air travel involving control tower closures, ending overnight shifts at control towers, and employment furloughs for more than 55,000 transportation employees. Worse, LaHood warned of delays up to 90 minutes at the nation’s busiest airports; he stated these delays are an attempt to protect transportation safety. There have been no crashes since 2009, according to the Washington Post.
The economy is in a liquidity trap where both income and interest rates are so low that people would rather keep money under a mattress than invest it. The Federal Reserve has been trying to combat this by increasing the money supply using a process known as quantitative easing, but monetary policy (i.e. adjusting the money supply) will not help. With interest rates at the lowest they can be, investment is still stagnant, and no additional supply of money can fix that, only two things can: more income or more demand for money. There is no government mechanism for adjusting money demand, so the only thing the government can do is spend more thereby increasing income and incentivizing people to invest instead of save. Sequestration will have the exact opposite effect; it will reduce income even more, pushing the U.S. farther into the liquidity trap.
If these facts are not enough, Congress designed sequestration to be so detrimental to the economy that it would never take place and to contain politically unpopular defense cuts for Republicans and domestic cuts for Democrats. Instead, as The Washington Post reports, the Tea Party is taking credit for the sequester and each dollar of cuts, and Speaker of the House John Boehner proposed a Tea Party-style plan for deficit reduction, balancing the budget by the end of the decade without any tax increases. That would be the equivalent of five sequestration-sized budget cuts having a proportional negative effect on the economy.
Sequestration hurts Main Street America by putting people out of work, reducing income and decreasing consumption. It hurts businesses by pushing us farther into the liquidity trap. A non-partisan figure like Federal Reserve Chairman Ben Bernanke must come out and forcefully denounce these cuts as bad policy and bad economics.
Congress and the president must get together and stop sequestration. Public policy formerly considered so terrible that it would force Republicans and Democrats to compromise cannot be an acceptable solution to the deficit issue. Democrats and moderate Republicans must shun conservative radicalism and come together to do the work of our nation, not forcing Americans out of a job but ensuring that they can find one.
Zac Bears is a Collegian columnist. He can be reached at email@example.com.