The Sequester Is a Failure—Posner

Becker is certainly correct that the sequester has had less of an adverse effect on the economy than was predicted. But it has failed, thus far, because the object was to frighten Congress and the President into agreeing to sensible fiscal reforms that would keep the federal deficit within tolerable limits. Because the sequester has had only modest economic effects (in part because some of its most onerous provisions were quickly modified), the pressure on the politicians that it was supposed to exert has lifted. 

So it hasn’t had the good effect that was predicted, but it has had bad effects. It has slowed the economic recovery, even if not dramatically (yet it may be too soon to tell). It is true as Becker points out that employment has continued to grow, despite the sequester, but it would have grown faster without it. The sequester has caused substantial layoffs both of federal employees and of employees of companies in the defense industry, which are dependent on federal financing that the sequester has slashed. Not all the laid-off employees have found equivalent jobs in state or local government or the private sector. (It is not like the aftermath of World War II, where the millions of soldiers released back into the civilian sector quickly found jobs—they were returning to the jobs they had held before being drafted, or to jobs opened up by massive conversion of military to civilian production.) Moreover, many federal employees not laid off have been furloughed without pay for several days a month, reducing their income and hence their spending. And slashes in a number of programs intended to assist the poor and semi-poor, programs such as Head Start and Meals on Wheels, have to have reduced consumer spending. As Keynes pointed out, consumption drives production, which drives employment. And to the extent the sequester had further increased the marked and growing inequality of income and wealth in America, it has done further harm to the country. 

And the sequester is only in its fifth month. Pursuant to the Biblical injunction “sufficient unto the day is the evil thereof,” federal agencies have been ingenious in delaying the full effects of the sequester by drawing on reserve funds. As these funds become exhausted, layoffs and furloughs will increase. 

I am also troubled by the potential effect on the military of the reduction in its funding decreed by the sequester statute. Of course we shall continue to have by far the world’s largest military budget even after the full effect of the sequester has been experienced, and no doubt that budget contains plenty of waste. But cutting the budget of a government agency is not an effective method of cutting waste, because agencies are not in competitive markets, where failure to achieve efficiency invites takeover or bankruptcy. Politics determines what programs are terminated or shrunk in response to a reduction in the agency’s budget. 

Because of the extreme instability of much of the world, the threat to the United States posed by hostile countries such as Iran and North Korea, the incipient threat posed by China’s chauvinistic foreign policy, the extraordinarily rapid technological advances in menacing domains such as cyber warfare, and the continued threat of international terrorism, the United States confronts a formidable array of national security problems. Arbitrary cuts in overall national security spending, at such a time, are reckless. 

The Administration seems not to have managed the sequester intelligently. The only possible benefit of the sequester was as I said to frighten Congress into addressing the federal deficit intelligently. For that benefit to be realized the sequester had to hurt. But the Administration quickly backed off from sequester measures that would have hurt, such as laying off air controllers. By making the sequester seem innocuous, the Administration played into the hands of Republicans who want to shrink the federal government regardless of adverse consequences and now are crowing that federal expenditures can be significantly reduced, even by meat-ax methods, without visible adverse consequences. There are adverse consequences to the sequester, and they will probably increase as agency reserve funds are depleted, but they are as yet invisible to most Americans. 

One sees a repetition here of one of the biggest blunders in the early days of the Obama Administration (in fact a few weeks before Obama’s inauguration), when Christina Romer, the incoming chairman of the Council of Economic Advisers, predicted that the stimulus the Administration intended to request Congress to enact would reduce the unemployment rate from 8.2 percent to 7 percent by the fourth quarter of 2009. The stimulus was enacted but the unemployment rose to 10 percent by the end of the year, allowing Republicans to argue that the stimulus had had no effect on unemployment, though most economists believe that it kept the unemployment rate from rising even farther. At least the Administration that time did not take affirmative steps to falsify its own predictions, as it did this time by weakening the sequester’s bite, thus making cuts in federal spending seem costless to society.

Comments

[Neilehat]

"Sequestration" an Economic failure? Of course. What we really have is the practice and policies of Political Economics by euphemism, and as we all know, Words are a poor substitute for real action. But as a Nation what else can we expect from such a Congress...

[B Wilds]

While the subject of the budget has dropped off the radar for a bit as the focus of the American people has wandered off to subjects like NSA surveillance and the death of a black teenager in Florida it seems the budget is about to raise its ugly head again. Sadly little has changed, we have been lulled with the rest of the world into complacency as we have kicked the can down the road and as a nation feeling little pain from the sequester. Not dealing with what we were told was a massive problem has only reinforced the idea that far too much has been made as to the ramifications of an out of control budget going forward. A resent post on my blog site talks about how this topic will soon be front and center,

http://brucewilds.blogspot.com/2013/08/budget-woes-approching-very-fast.html