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March 1, 2013
How Bad is the Sequester?
From the sound of the legacy media the sequester is very bad and dangerous. Wailing and gnashing of teeth permeates the news coverage as Politicians predict the end of the world. But what is the truth?
One truth is that 46% of Federal spending is money borrowed from individuals or the Federal Reserve. The red ink looks like this. Put 46% borrowed following this.
Nearly every news report describes the horrendous $85 Billion across-the-board cuts. The legacy media outlets are wrong on two accounts.
Nick Gillespie in a Reason article documented the actual spending cuts based on the February CBO report:
The first thing to note is that the $85 billion figure that gets bandied about overstates this year's cuts due to sequestration by about $40 billion. According to the Congressional Budget Office (CBO) in its February 2013 report on the budget outlook, "Discretionary outlays will drop by $35 billion and mandatory spending will be reduced by $9 billion this year as a direct result of those procedures [sequestration]...
The CBO total is a cut in spending of $44 billion this year. Half the $44 billion cut is applied to non--defense spending with defense spending absorbing the remaining $22 billion. At 18% of on-budget spending, defense takes the largest hit.
The Senate hasn't passed a budget for some time, instead spending money by continuing resolution. Without a budget we can only calculate the impact of the sequester by using last year's actual spending.
Total spending for 2012 was $3,563 billion, and does not include Social Security and other off-budget entitlement spending. Cutting spending across the board would be a bit over a 1% reduction.
But the sequester isn't across the board. Half of the cuts come from Defense. When $22 billion is cut from the smaller defense spending, the cut is 3.3% of defense spending. Non-defense spending is much larger so a cut of $22 billion is a much smaller percentage, 0.76%. Put defense and non-defense cuts side by side following this.
We have been told by President Obama "we can't cut our way to prosperity," but is that true? Research by W. Michael Cox and Richard Alm is reported in Investors Business Daily. They compared U.S. government spending as a share of gross domestic product and determined whether the higher spending had lowered unemployment rates.
From the 1950s through the 1970s, spending and unemployment moved up and down together. In the 1980s-90s, they had another nicely choreographed decline...
So now we come to our current Keynesian episode. An $825 billion stimulus package, passed in February 2009...
At the time, proponents projected that the stimulus would keep the jobless rate below 8%. While government went on its pending spree, unemployment kept rising, peaking at 10% in October 2009. After three years of the stimulus, funded with borrowed money, unemployment hadn't yet gone down to 8%.
We know how that stimulus spending worked out, don't we? The Cox and Alm research is confirmed by research done by Dr. John Lott reported in the Daily Caller. Dr. Lott observed "what results do we get for developed countries? Austerity works, Keynesian stimulus does not. And, again, bigger stimuluses have a detrimental effect on employment."
Scott Minerd described the situation more directly. "Sovereign powers saddled with debt loads as large as those of the U.S., Europe, and Japan today are jeopardizing their long-term economic well being."
The popular political belief is that Keynes proved that Government could control the economy with spending. That political theory allows politicians to believe they can control millions of buying, selling, product development, and allocation decisions. This allows politicians to justify the addiction to spending more and more of other people's money.
So the obvious question is how difficult is it to cut spending? Are there any easy things to cut to limit spending? The government itself has the answer. The Government Accountability Office (GAO) has reviewed spending. The report shows significant savings are possible. As part of its research, the Heritage Foundation analyzed the report. Heritage found the report suggested a savings of as much as $100 billion was possible by eliminating duplication. Some of the areas highlighted were:
Twenty agencies operating 56 programs dedicated to financial literacy. GAO and agencies can't estimate what they cost.
The Department of Transportation spends $58 billion on 100 programs run by five agencies with 6,000 employees that haven't evolved since 1956.
Assuming that eliminating duplication would only save half that, $50 billion is still a lot of money. Add to that the improper payments the GAO found and now we are talking real money. CNS news reports the details:
Federal agencies reported improper payments estimated at $125.4 billion in fiscal year 2010, an increase of $16.2 billion from the $109.2 billion estimate in fiscal 2009, the Government Accountability Office said...
The $125 billion in improper payments came from 70 different programs across 20 federal agencies. "This estimate represents about 5.5 percent of the $2.3 trillion of reported outlays for the related programs in fiscal year 2010," GAO said.
Have we cut any of that spending? Of course not, we need a balanced approach with more and more taxes.
Local reaction to the sequester came from an Oregon political analyst. When interviewed for radio news, he said that early childhood education could be cut by 20%. Meanwhile, the Oregonian reports the Transportation Department identified control towers that would close in Troutdale, Klamath Falls, North Bend, Pendleton, and Salem. That's basically all the population centers in Oregon. All that for a 0.76% cut in spending. Secretary Ray LaHood might keep in mind the $58 billion spent by the Transportation department on 100 programs run by five agencies with 6,000 employees that haven't evolved since 1956. This does show how hard the bureaucrats are working to scare you and your local and state politicians.
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