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Sequestration, Deficits, Growth, and Politics

On Wednesday, August 12, Michael Tasselmyer posted a short comment, at the National Taxpayers Union Foundation's blog, Government Byes, concerning a request from Senator Bernie Sanders (I-VT) to the Congressional Budget Office "to analyze the macroeconomic effects of repealing the sequestration budget caps on discretionary spending."

Here is the background, according to Tasselmyer (links copied from original):

" . . . CBO Director Keith Hall wrote in a letter that repealing the sequester could increase GDP and employment. However, any short term gain would come at a long term price: the agency also said that repealing sequester caps would increase deficits and result in lower output and income than projected under current law.

"Sanders, the ranking member on the Senate Budget Committee, commented on CBO's findings in a statement: "These arbitrary sequestration caps have never made any sense, and now we see even more clearly the implications for our workers. ... If Congress does not act to end sequestration, we're looking at the loss of as many as 1.4 million jobs over the next two years."

Tasselmyer then provides the following analysis:

"However, the Senator's statement ignores several realities about the CBO's projections that should be considered.

  • Economic gains from repealing sequester are uncertain. CBO projects that undoing the spending caps would increase GDP by anywhere from 0.2 to 1 percent over the next two years, and employment by the equivalent of 300,000 to 1.4 million full-time jobs. That is a very wide and highly variable range, of which Senator Sanders only cited the most optimistic ends.
  • The assumptions behind CBO's projections matter. Namely, those that directly correlate increased government spending with greater economic growth. By definition, GDP -- which is the product of consumption, investment, government spending, and net exports -- will increase any time the government spends more money. However, GDP is not the only measure of an economy's strength, and whether public spending actually stimulates the economy is the subject of continued debate among economists.
  • The long term economic implications would reverse any immediate growth. In CBO's own words: "Although eliminating the reductions to the spending caps for fiscal years 2016 and 2017 would increase output and employment over the next few years, the resulting increases in federal deficits would, in the longer term, make the nation's output and income lower than they would be otherwise." (Italics added for emphasis.)
  • Repealing the caps would reduce private investment. Without spending caps in place, federal spending would increase by about $159 billion over the next three years. That would lead to higher deficits that "would start to gradually reduce -- or crowd out -- private investment in productive capital because the portion of people's savings used to buy government securities would not be available to finance private investment."
"The economic benefits of repealing sequestration are uncertain, at best, and would likely be offset by the long-term losses that higher deficits would cause." (Emphasis in the original)

The Congressional Budget Office (CBO) also released an August 2015 update to its required report on sequestration last week. The summary from the report says:

"CBO is required by law to issue a report by August 15 of each year that provides estimates of the caps on discretionary budget authority in effect for each fiscal year through 2021. CBO has updated its estimates of the caps for 2015 since it issued its previous report on the topic in January 2015. In that earlier report, CBO estimated that the appropriations for 2015 did not exceed the caps. CBO’s assessment remains unchanged—the discretionary appropriations provided to date for 2015 do not exceed the caps, and thus, by CBO’s estimates, a further sequestration (or cancellation of budgetary resources) will not be required as a result of appropriation actions this year.

"However, the authority to determine whether a sequestration is required and, if so, exactly how to make the necessary cuts in budget authority rests with the Administration’s Office of Management and Budget (OMB). That agency, in a report issued in March after enactment of the Department of Homeland Security Appropriations Act, 2015 (Public Law 114-4), also found that, at that time, appropriations for 2015 were at or below the caps."

Perhaps someone will suggest to Sen. Sanders that he sit down with several of Thomas Sowell's books. As Sowell has explained, there are no solutions, only economic trade-offs. For a short explanation, see Yahoo Answer's explanation.  For a longer explanation, see chapter 3 of Sowell's book, "Knowledge and Decisions," available at Google Books. There is also this You Tube Video where Sowell explains the concept of economic trade-offs to Fred Barnes; the accompany text includes this quote from another of Sowell's books:

'In the tragic vision, individual sufferings and social evils are inherent in the innate deficiencies of all human beings, whether these deficiencies are in knowledge, wisdom, morality, or courage. Moreover, the available resources are always inadequate to fulfill all the desires of all the people. Thus there are no "solutions" in the tragic vision, but only trade-offs that still leave many unfulfilled and much unhappiness in the world.'

~ Thomas Sowell, 'The Vision of the Anointed' p. 113

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