Naked Capitalism on the Sequester

Why Obama Refuses to Kill the Sequester

Posted: 25 Feb 2013 12:05 AM PST
The game of chicken both the Republicans and Democrats are playing with the sequester and the budget/deficit talks is striking. One of the truly bizarre elements is that neither side is signaling the faintest interest in dealmaking of any kind. As I indicated the week before last, the lack of any sense of urgency was obvious: Congress had a holiday last week, and there were no real negotiations or even an exchange of proposals, virtually guaranteeing the sequester would take place as scheduled.

And you could feel the indifference even before then: no rush to get to work right after either the inaugural partying or the State of the Union. By contrast, recall last November how we went with nary a beat from the election results to deficit scaremongering and frenzied “what a deal should look like” chatter? The big reason for the hard push was that the outgoing Congress was assumed to be more amenable to a Grand Bargain, or what Bill Black has correctly called a Great Betrayal, than the incoming one. But will that make any difference in the end?

A piece in the Wall Street Journal on Saturday gave a good overview of the state of play. The game plan is now that the sequester will be allowed to kick in and will stay in place until one side cries “Uncle,” when the impact on the economy is hurting one side badly enough in the polls to force it to relent. From the Journal:

The president and congressional Democrats are looking beyond Friday, when the across-the-board cuts, known as sequestration, are due to take effect. Their strategy is to persuade the public that the cuts would harm defense, education and other programs, make air travel difficult and cost jobs, among other effects. They hope public pressure would force Republicans to reverse course and agree to new tax revenue….

But a protracted fight over the spending cuts also could take a toll on Republicans. Polling shows Mr. Obama has a far higher approval rating than Congress and that people generally favor his position in the dispute. In the battle for public opinion, the White House will argue that Republicans are the reason people may face longer lines at airport and job furloughs. If that impression takes hold, that could cause trouble for Republicans in the 2014 midterm elections.

Republicans believe they can stay united by accusing Mr. Obama of campaigning rather than negotiating and reminding people that they have backed legislation to replace the cuts to defense programs with nondefense cuts. They say they won’t bend to Mr. Obama’s demand for new tax revenue and that the public supports their goal of reducing the deficit.

Both sides seem remarkably confident in their contradictory views, which suggests that there is more here than meets the eye. Notice how Bowles and Simpson have been hauled out of mothballs, and how the bipartisan plutocratic Fix the Debt messaging has ratcheted up? As the Democrats and Republicans play Punch and Judy with each other, the real effort will be to come up with a backroom deal on cutting Social Security and Medicare enticing enough to get the Republicans to persuade their recalcitrant members to accept some token tax increases to secure a much bigger prize.

But unless both sides get lucky and the sequester produces serious bad photo images (airport lines? parents stuck due to the cessation of federally funded daycare? noise about tax refunds arriving later than usual? slashing of support for low income groups, like rental assistance programs and Head Start? ) it likely be at least a month before there is any economic effect (which means at least another three weeks beyond that before a deal is agreed upon).

Even then, the blowback may not support the political classes’ desire for a middle-class fleecing deal. For instance, in the extract above, the Republican strategists seem to believe the public thinks reducing military spending is bad. In fact, polls show the public overwhelmingly favors curbing military spending over cutting Social Security and Medicare. And ironically if the armed forces cut the use of contractors (which is where reductions are expected to fall most heavily) those might also fall on overseas activities, which would blunt the domestic economic impact. And what if, mirabile dictu, the public starts realizing that government provides programs they like (this was one of the ironies Matt Taibbi tore into with Tea Partiers, that they were against government yet firmly dependent on it, with many members on Medicare)? If that idea began to dawn on more of the public, it could have meaningful long-term ramifications.

Don’t get me wrong, I’m not hopeful. Plus both parties have a ready excuse to shift tactics and messaging. A lot of government funding is reapproved annually, and the deadline is March 27. That gives both sides the opportunity to ease the pain on specific groups and programs that they think are being pinched too hard. But the two camps are acting as if they can get an outcome they want, when they are putting a new experiment in play. In other words, I’d expect what they don’t seem to be anticipating, which is the unexpected.

Below, Bill Black provides an important piece of the puzzle, namely, why Obama is so keen on the sequester.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly posted with Benzinga

We are in the midst of the blame game about the “Sequester.” I wrote last year about the fact that President Obama had twice blocked Republican efforts to remove the Sequester. President Obama went so far as to issue a veto threat to block the second effort. I found contemporaneous reportage on the President’s efforts to preserve the Sequester – and the articles were not critical of those efforts. I found no contemporaneous rebuttal by the administration of these reports.

In fairness, the Republicans did “start it” by threatening to cause the U.S. to default on its debts in 2011. Their actions were grotesquely irresponsible and anti-American. It is also true that the Republicans often supported the Sequester.

The point I was making was not who should be blamed for the insanity of the Sequester. The answer was always both political parties. I raised the President’s efforts to save the Sequester because they revealed his real preferences. Those of us who teach economics explain to our students that what people say about their preferences is not as reliable as how they act. Their actions reveal their true preferences. President Obama has always known that the Sequester is terrible public policy. He has blasted it as a “manufactured crisis.”

The administration has stated publicly the three reasons this is so. First, the Sequester represents self-destructive austerity. Indeed, it would be the fourth act of self-destructive austerity. The August 2011 budget deal already sharply limited spending and the January 2013 “fiscal cliff” deal raised taxes on the wealthiest Americans and restored the full payroll tax. The cumulative effect of these three forms of austerity has already strangled the (modest) recovery – adding the Sequester, particularly given the Eurozone’s austerity-induced recession, could tip us into a gratuitous recession.

Second, the Sequester is a particularly stupid way to inflict austerity on a Nation. It is a bad combination of across the board cuts – but with many exemptions that lead to the cuts concentrating heavily in many vital programs that are already badly underfunded.

Third, conservatives purport to believe in what Paul Krugman derisively calls the “confidence fairy.” They assert that uncertainty explains our inadequate demand. The absurd, self-destructive austerity deals induced or threatened by the Sequester have caused recurrent crises and maximized uncertainty. They also show that the U.S. is not ready for prime time.

When he acted to save the Sequester, Obama proved that he preferred the Sequester to the alternative. When the alternative threatened by the Republicans was causing a default on the U.S. debt (by refusing to increase the debt limit), one could understand Obama’s preference (though even there I would have called the Republican bluff). The Republicans, however, had extended the debt limit in both of the cases that President Obama acted to save the Sequester in 2011.

Similarly, President Obama has revealed his real preferences in the current blame game by not calling for a clean bill eliminating the Sequester. It is striking that as far as I know (1) neither Obama nor any administration official has called for the elimination of the Sequester and (2) we have a fairly silly blame game about how the Sequester was created without discussing the implications of Obama’s continuing failure to call for the elimination of the Sequester despite his knowledge that it is highly self-destructive.

The only logical inference that can be drawn is that Obama remains committed to inflicting the “Grand Bargain” (really, the Grand Betrayal) on the Nation in his quest for a “legacy” and continues to believe that the Sequester provides him the essential leverage he feels he needs to coerce Senate progressives to adopt austerity, make deep cuts in vital social programs, and to begin to unravel the safety net. Obama’s newest budget offer includes cuts to the safety net and provides that 2/3 of the austerity inflicted would consist of spending cuts instead of tax increases. When that package is one’s starting position the end result of any deal will be far worse.

In any event, there is a clear answer to how to help our Nation. Both Parties should agree tomorrow to do a clean deal eliminating the Sequester without any conditions. By doing so, Obama would demonstrate that he had no desire to inflict the Grand Betrayal.

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One response to “Naked Capitalism on the Sequester

  1. The real insult to the American people is the Republicans going on a break during this whole fiasco……and you know that they didn’t lose one second of sleep over it.

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