Thursday, May 24 , 2018, 1:14 pm | Overcast 61º

 
 
 

Craig Allen: Sequester Cuts Virtually Meaningless in Reality, But Not in Perception or Politics

We have spent the last several weeks — really, since the “fiscal cliff” debate at the end of December — worrying about the possible negative consequences of the sequester spending cuts. Under the sequester, which went into effect Friday and is the result of 2011 debt-ceiling negotiations, defense and other government spending must be reduced by $85 billion a year over the next 10 years. While $85 billion sounds like a lot of money (and it is), the real impact of these spending cuts is virtually meaningless, at least in terms of their impact on the economy. However, the negative consequences for lawmakers and especially for President Barack Obama could be far more serious.

The sequester spending cuts that will be phased-in over the next few months have been widely described, mostly by Obama, as being highly destructive to government operations. In a speech last week he claimed that government workers who maintain the grounds at the Capitol in Washington, D.C., would suffer cuts in pay and furloughs.

“Starting tomorrow everybody here, all the folks who are cleaning the floors at the Capitol,” Obama said. “Now that Congress has left, somebody’s going to be vacuuming and cleaning those floors and throwing out the garbage. They’re going to have less pay. The janitors, the security guards, they just got a pay cut, and they’ve got to figure out how to manage that. That’s real.”

Minutes later, Carlos Elias, the Capitol building superintendent, sent out a memo reminding staffers that the current sequestration plan does not include “reductions in force or furloughs,” and that “pay and benefit of each of our employees will not be impacted.”

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Instead of spending the last two months actively seeking a real solution to the debt and budget deficit crisis, Obama has been jetting around making speeches accusing congressional Republicans of stonewalling him and refusing to discuss more tax increases. The Republicans have maintained that they already gave in on tax increases at the end of 2012 to avert the fiscal cliff, and they have no intention of agreeing to even more tax increases just so Obama and the Democrats can increase spending. Obama spent three days last month in Florida playing golf instead of working on a compromise that might have avoided the sequester cuts. It seems he believed that by berating the GOP in the media he could manipulate them into agreeing to more tax increases. It didn’t work.

Regardless of who is to blame, the reality is that the sequester cuts — which will certainly affect some government programs and workers — are virtually meaningless in the big picture of the annual budget. While $85 billion sounds like a ton of money, in comparison to the more than $3.5 trillion we spend each year, it represents less than 2.5 percent of the budget. Not only is this percentage of the budget not going to make any real negative impact on government operations or on the economy, it isn’t going to help us get our debt under control either. Simply put, it isn’t nearly enough.

The sequester cuts were really just a stop-gap measure designed to force Congress and Obama to come to a real agreement on spending cuts. The supercommittee tasked with coming up with the real solution instead failed to come up with a viable plan, and thus, we got stuck with the sequester cuts.

What Obama isn’t talking about are cuts to entitlements such as Social Security and Medicare. These massive programs are where the real cuts need to be made if we are ever going to get our debt under control. Obama and his fellow Democrats flatly refused to even discuss any cuts to these programs during the fiscal cliff debate, and they’ve not changed their position since. For all the compromise rhetoric from Obama, he never once offered any real solution that included cuts to any of these programs. His idea of compromise seems to be that Republicans should just give him exactly what he wants: tax increases, elimination of tax loopholes and spending increases. The Republicans have not caved in to his PR campaign of blame, and here we are stuck with the sequester cuts.

Regardless of which side of this debate you may identify with, the reality is that we have a highly dysfunctional government. I blame both sides: Obama and the Democrats haven’t been willing to give in (at all) on any cuts to entitlements, and the Republicans have rigidly stuck to their opposition to tax increases and their support of closing tax loopholes. The reality is, to make any real impact on our debt, we have to do both: cut spending significantly, which must include entitlement cuts, and close loopholes so we increase revenues.

I believe that if those on both sides believed we could depend on both sides sticking to the agreement, we could come up with a real compromise that included spending cuts and tax increases. We are all in this together and we are all going to have to suffer a bit to get out of it. This means we are all going to have to pay more and we are all going to have to suffer from cuts to spending, which will mean less government services and some weakness in the economy that will result from the reduction in spending.

The problem is that those on both sides do not believe in the sincerity of the other side, so they will not agree to give in on much of anything. I am not sure what the real solution to this issue will be, but we must find a viable outcome because our national debt, which is quickly approaching $17 trillion, is only getting larger, and very rapidly.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here to read previous columns or follow him on Twitter: @MPAMCraig. The opinions expressed are his own.

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