US budget sequestration is folly

The bet, as of last weekend, was that it would take effect. According to the latest poll conducted by the Pew Research Centre from February 13-18, 49 per cent of the respondents were in favour of Congress taking action to delay the automatic spending cuts, while 40 per cent would let the sequester go into effect. In the same poll, 49 per cent blamed the Republicans in Congress for the inaction, while 31 per cent blamed President Obama.

Many in Thailand and the rest of the world must be scratching their heads watching the new low of political gamesmanship and dysfunction in Washington. The sequester of automatic, across-the-board cuts of US$85 billion in discretionary spending - that is, excluding Social Security, Medicare, and other entitlement programmes - was part of the agreement to end the 2011 debt-ceiling standoff. It was intentionally designed to be drastic and to be considered senseless and such an abdication of responsibility that it was not supposed to happen. It was so odious that politicians would never go for it. It looks like the well-intentioned legislators may have over-estimated their own intelligence as a collective body.

Those who are in favour of the automatic, across-the-board spending cuts, including some Wall Street commentators, view it as a proactive strategy for reducing the size of the government. They play down the cuts of $85 billion in this year's budget as only a mere 2.2-per cent cut out of the total federal budget of $3,800 billion. 

The cuts, they suggest, will not have any significant impact on the economy. Unfortunately, these zealots did not even get the numbers straight. The $85 billion cut is actually out of discretionary spending, not the entire budget, which includes the mandatory spending that is not included in the sequestration. When the mandatory spending is excluded, the $85 billion cut amounts to about 8 per cent and not 2.2 per cent.

The fundamental disagreement between the Obama administration and the Republicans in Congress is about how to approach America's budget deficits and large-scale government borrowing under the circumstances of fragile economic recovery, sluggish growth and high unemployment. The administration proposed what it calls a "balanced approach" of combining the closure of tax loopholes to raise more revenue, less drastic and more targetted cuts, and some measures for investment to stimulate growth and jobs.

The Republicans in Congress want a faster pace on deficit and debt reduction while refusing to accept revenue-raising reforms, and do not trust the government to stimulate growth and jobs. They continue to believe in the "expansionary austerity" policy even though empirical evidence is not on their side. This is exemplified by the experience of the United Kingdom, which has adopted the expansionary austerity approach since 2010. It is experiencing a triple-dip recession. Its credit rating has just been downgraded by Moody's, from triple A to AA1.

The Obama administration stepped up its campaign this past weekend to inform the public of the effects of sequestration by detailing how the cuts would affect programmes in ever state. For example, it highlighted massive delays in flights and the closing of smaller air-traffic control towers; cuts in elementary school funding and access to early education for poor children, putting at risk teacher and teacher-aide jobs; and the loss of 150,000 civilian jobs in the Defence Department in the Washington area alone.

While large-scale government borrowing can be a real problem, reducing national debt takes time, and expectations for the path toward lowering the debt level should be realistic, especially in the context of a weak global economic environment. Too fast, drastic, indiscriminate spending cuts can hurt growth and work against sustainable debt reduction.

From an Asian and global perspective, the sequestration and the standoff could undermine not only the health of the US economy and the world economy, but also limit America's commitment and engagement in Asia under its Trans-Pacific Partnership that is still in the developmental stage.

The mood in Washington one of impotency and resignation. Let's hope in the coming week the Republicans and the administration can come together to find a way to avoid the folly of budget sequestration.

Kiertisak Toh is a former senior Foreign Service officer with the US Agency for International Development. He is currently a member of the economics faculty at Radford University, Virginia, and a senior fellow at Duke Centre for International Development, Sanford School of Public Policy. This commentary was originally published in The Nation.

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