HONG KONG – America’s sequester — an ugly word for a still uglier failure of the political process — is under way with damaging consequences. If the American executive branch and Congress cannot agree on a relatively simple thing like the budget, what hope is there of U.S. leadership on important matters? The fall in U.S. economic growth will also have a cascading damaging impact on the rest of the world and growth, job and trade prospects.
Alice Rivlin, the former vice chairman of the U.S. Federal Reserve, hit the nail on the head when she compared the struggle over U.S. budget cuts to a playground fight by schoolchildren. But while right, she is also dreadfully wrong — because there is no sign that the unruly brats are going to stop fighting any time soon. That is bad news for the world economy, but it also signals the beginning of the end of the U.S. economic imperium of the world.
President Barack Obama signed the order for an initial $85 billion of cuts to government spending under the sequester program. He warned that Americans face the loss of up to 750,000 jobs along with a 0.5 percent cut in economic growth, which will cause a “ripple effect” of pain, especially among the U.S. middle classes. “Businesses will suffer because customers will have less money to spend. These cuts are not smart,” declared the president.
Sequester will not only cause widespread and increasing pain, but because it does little to solve the underlying problems that the U.S. government faces of getting its financial house in order.
The defense budget will take the biggest hit with cuts of $40 billion or 9 percent of total spending by September. But all government departments must cut their budgets by about 5 percent. Medicaid and basic welfare services alone will be exempted. Sequestration will involve $1.2 trillion in cuts between now and 2023.
The cuts come on top of $1.5 trillion that Obama and Congress agreed in 2011 plus $700 billion from the deal over ending the George W. Bush era tax cuts for the super-rich and another $700 billion that will come from reduced interest payments on the smaller debt. This means that the total savings will already be close to $4 trillion, which is the commonly touted figure of cuts needed to stabilize America’s debt.
But sequestration is both brutal and ugly. It was intended to be the ultimate weapon that would force the two sides to work out a compromise, so it would never come into force. It involves across the board cuts that take little account of what is wasteful and what is healthy spending. Economists say that the cuts will take a heavy toll on economic growth and damage job creation.
Sequestration also does nothing to curb the growth in America’s entitlement programs on social security, welfare, Medicare and Medicaid, which risk running out of control with the country’s rapidly aging population. Republicans say that these programs are the weeds that must be cut down. Democrats want a mixture of entitlement cuts and higher taxes on the rich who have gobbled up almost the lion’s share of recent rises in economic growth.
Rivlin’s comments were sensible. “Parents and preschool teachers know what to do when kids are fighting,” she wrote in an Opinion note for Brookings Institution. “First, halt the damage. Then, stop the blaming — it does not matter right now who hit whom first. Then, propose a constructive project — help me clear the plates or rake the leaves — that both sides can turn to right away. Usually peace is restored and the kids work together.”
The trouble is that there is no adult in the room who can take charge. If this were a struggle between Republicans and Democrats in Congress, then the president might be able to step in as the voice of the nation. But Obama has been at the heart of this playground squabble from the start. Bob Woodward’s book “The Price of Politics” portrays in depressing day-to-day and blow-by-blow detail how the struggle has gone on from just before Obama’s initial inauguration in 2009.
The vicious and, at times, visceral personal edge to some of the politicking as detailed by Woodward should make Americans worry about who might emerge in the role of Rivlin’s adult to restore sense and a sense of national compromise.
Evidently, Obama’s commanding re-election and the election rebuff to the tea party wing of the Republican Party have done nothing to assert his authority as the wise adult of the country.
As sequestration started, the squabbling and name calling continued. Obama squarely blamed the Republicans for their steadfast opposition to taxes on the rich, claiming that sequestration was not smart and what the U.S. needs is “a balanced approach — one that combines smart spending cuts with entitlement reform and changes to our tax code that make it more fair for families and businesses without raising anyone’s tax rates.”
The Republican response from house of representatives member Cathy McMorris Rodgers offered no compromise. “The problem isn’t a lack of taxes,” she declared, claiming that the federal government’s tax take this year would be a record. “Spending is the problem, which means cutting spending is the solution. It’s that simple.”
It is not really that simple, except for simple and single-minded politicians: government revenue is high in dollar terms, but is falling in terms of gross domestic product; spending is falling in terms of the overall economy but will rise again as the generation of baby boomers reaches retirement age.
Rivlin suggested that “the public must take overt the role of the adult in charge.” But that is easier said than done, and shows the limits of U.S. democracy. After all, Obama has the authority of his re-election, and so do the members of Congress.
The playground fights are continuing with new vigor. Congress has fudged and pushed back deadlines that might see the federal government forced to shut down for lack of funding. But the sequester is still in place. And soon there will be the prospect of battle to raise the federal debt ceiling, which was one of the original reasons for the playground fight.
The rest of the world might watch with bemusement at the prospect of the U.S. tearing itself apart, if not for the fact that America is still the world’s biggest economy and helps to set the pace of growth in the rest of the world. The world may not get pneumonia when America sneezes, but it may still get a debilitating bout of flu.
Kevin Rafferty is editor in chief of PlainWords media.