Mitigating the Sequester
Most political speeches are difficult to listen to - full of lofty statements, often unabashedly partisan with lots of intermittent applause, and absent, or at least thin, of any specific plan to implement or change policy. So it was with President Obama's State of the Union speech (like Award shows, I didn't watch). While the US gross debt clock kept ticking closer to $17 trillion (greater than the total value of the US economy), Mr Obama spoke of how "smart" it would be for the government to spend more - on education, including universal access to pre-school and vocational training programs, more on infrastructure, and more on measures to promote manufacturing and the hiring of the long-term unemployed. Fine ideas, no doubt, and, moreover, such new expenditures would (somehow) not add one dime to the budget deficit (presumably because of their ultimate impact on productivity and hence tax revenues?). One wonders whether Chinese and other foreign investors, important buyers/holders of the unending supply of American debt, woke up this morning thinking that perhaps it was time to sell their US Treasury bonds.
In his address, Mr. Obama exhibited, briefly, some sense of realism when he noted that it was hardly fitting for the "most important nation on the face of the earth" to be drifting from one manufactured fiscal crisis to another. But, rather than striking a conciliatory tone, he reiterated his now well-worn "class" theme, intoning that senior citizens and working families should not be asked "to shoulder the entire burden of deficit reduction while asking nothing more from the wealthiest and most powerful". Congressional Republicans must have been provoked anew, having conceded to tax increases on the wealthiest - while getting no spending cuts in return - just last month in a last-minute, New Year's Eve deal to avert the fiscal cliff. Whatever political goodwill was left in Congress prior to the President's speech - and it wasn't much - there is certainly none now.
Without it, it is difficult to imagine how the next "manufactured crisis" can be averted - the so-called sequester, due March 1. It mandates very large discretionary spending cuts (spending that must be authorized each year by Congress) which fall heavily on defence, and much smaller mandatory spending cuts, taken together totaling $1.1 trillion over the next ten years. Neither Congress nor the White House wants the sequester - it's a very blunt way to budget. It is too much too soon for a still tepid economic recovery, and the mix of cuts is wrong. The principal driver of projected government deficits is mandatory, not discretionary, spending, that is, the entitlement programs - Social Security, Medicaid and Medicare, and Obama Care health-care subsidies.
These need to be reformed now, if they are to be sustainable - as does the tax code (what happened to the discussion about revamping the tax code?). But the White House and House Democrats have once again dug in their position, apparently insisting on more tax increases on the wealthy, and on oil companies, as part of any agreement to modify entitlements. Republicans, particularly the so-called "young guns" led by Eric Cantor (the House Majority Leader) and Paul Ryan (the Chairman of the House Budget Committee), are equally dug in, arguing that America's deficit problem cannot be taxed away, and that in any case they have already given in to tax increases on the rich. Mr. Ryan, seemingly frustrated, recently said, "I'm expecting the sequester to take effect" because he does not now believe Democrats will focus on mandatory spending cuts.
This time, a late-night deal on February 28, like the one hatched on New Year's Eve by Vice-president Biden and Senate Minority Leader McConnell to deter the fiscal cliff, appears improbable. The young guns won't have it, again.