VOX POLITIC

Is Sequester the Only Way to Fix Our Economic Woes?

Posted In: Politics, National, Opinion,   From Issue 766   By: Matt deHeus

14th March, 2013     0

Let's face it, television news is largely unwatchable.   This isn't a sudden situation, but something that has evolved over time.  Gone are the days when you chose one of three flavors, all of them substantial.  While it was still a 24-hour news cycle for earlier television journalistic eras, given the very narrow window of an evening or morning news program, they tended to report on things that mattered.  They didn't have time for fluff and they certainly didn't have time to manufacture news.   The weightiest events of the day were enough.
 
A strange thing has happened as the information age has bloomed.   Fact is there really isn't any more to report today than there was in any other period of mankind.  It's just that we have more airtime available and the barrier to entry seems to be pretty small.  In the same wave that swept Snookie and TheSituation to fame, the advent of all day news and the need to fill an awful lot of airtime means the most mundane of concepts can become the cause of the day or the crisis of this century.
 
Television news is probably at its worst when the whole industry has responded in “crisis mode” to what should be a relatively mundane event.  It's like they've applied the “Stormcenter 2013” mentality to the coverage of very basic matters of governance - like budgets.  Uncertainty sells.  Reporting the news has moved largely from discussing and analyzing what has happened to predicting and arguing about what might happen.
 
Bad Rap
 
What you really have to love is when the collective media latch on to a new word.  While we are truly lucky that we do not appear to have a current “-Gate” scandal, history would indicate that one is probably not far away.  More recently, as you quickly skimmed through the bunched news channels on the cable box, there is a probability that is sounds a lot like an old Malcolm McLaren scratch record: “Sequester, Sequester.  Seq, seq, seq, sequester.  Should we sequester?”
 
What they are talking about, of course, is the Budget Control Act of 2011, signed as a stop gap measure in exchange for another short term raise in the “debt ceiling,” which allowed the US to continue borrowing and paying for its activities in the manner in which it has become accustomed.
 
The idea is simply that Congress was going to use the time between August 2011 and March 1, 2013 to develop long term plans for federal spending and taxation.  According to the Act, if no deal was reached, $1.2 trillion in budget cuts would be automatically invoked over an eight year period, ending in 2021.  The cuts are intended to be divided equally between domestic spending and defense.  The first $85 billion are basically ready to go into effect now. 
 
Well, they say timing is everything and both the President and the Republican controlled Congress might have provided a clearer path to their budgetary goals.  But as you might guess, the time has not been used productively.  Both sides postured, nothing got done, and despite the lofty goals of another State of the Union address, we are staring down the barrel of an ill-defined austerity program.  The Sequester inevitably will end up cutting the costs that are the easiest to cut and not necessarily those that should be cut.
 
This high wire act on budgeting has been business as usual over the last couple of decades in the Federal government.  These debates become especially heated when we have a party split between the Halls of Congress and the Oval Office.  One appropriates, the other executes.  The real story is they truly  need to work together for things to function efficiently, but they don't.  So what better than a little friction to spark a made for TV controversy filled with deadlines, gamesmanship and dire consequences if action is not taken immediately.  It may not be quite as exciting as an impending snowstorm or a short term celebrity wedding, but you have to work your beat.
 
A License to Print Money
 
It's a little early to weigh in on the effectiveness of the Obama Era, but when you look at the available numbers, you would be hard pressed to make a case that things haven't gotten better for “the economy.”   Granted, any improvement is off the extremely low base that he inherited after the financial meltdown of 2008.  But despite criticism of this Administration's capitalist credentials, the Dow Jones Stock Market index has recently set an all-time high.   And, even when factoring in federal funded Stimulus exercises and the continued twin debacles of Iraq and Afghanistan (and who knows where else), spending growth has slowed substantially under the Obama Administration.  Part of this might be the design of the current Administration and part might be through execution of policies set in motion under Presidents Bush and Clinton that have finally kicked in. 
 
The real truth might lie in the Obama Administration's ability to practice a “mañana” fiscal policy - basically pushing problems off until tomorrow.  Much like the sequester pushed a crisis off for a few months, the Administration has been fairly successful in staving off real time problems by pushing the costs into the future.  The problem is this is not a new tactic and, where it once was possible to push a debt well into the future; the bills are coming due quicker now.  And, while  Obama's first term was one marked largely by fiscal responsibility (at least the “top line,” if not in the nuts and bolts), there are big bills - including the full cost of implementing the Affordable Health Care Act - that will start coming due in the very near future. 
 
Some might call it a deft fiscal touch or a clever use of the levers that a government has to move an economy forward; others might be reminded of a friend who felt they had solved their financial issues by getting access to two or three simultaneous “payday loans.”  It might feel like breathing room.  It might even feel like cash flow.  But it's not.  Spending it projected to ramp up by 6 to 12% per annum over the next several years.  So much for austerity.
 
 
What Won't Work
 
We all know that Federal spending is at an unsustainable level and has been for a long time.    Barack Obama will administer a budget in 2013 of approximately $3.8 trillion dollars, about the same level as in 2012.  Surely there is some fat in there, right?
 
The problem might be in this analogy.  We will often describe our public spending like it is a piece of meat or a tree to be trimmed, with unnecessary or unhealthy parts trimmed away, leaving a leaner and more robust entity.  Physical fitness / fiscal fitness - makes a perfect comparison, huh?
 
I find it more useful to think of this economic puzzle like an old inner tube tire.  The rubber bladder is the US economy, with a myriad of patches attached over the years representing the economies of other countries and, more recently, gigantic multinationals which now rival some countries in size and influence.  The air in the tube is our government spending.  Too much and the tire explodes; not enough and the tire goes flat, rolls inefficiently and you find the patches come loose and begin to fail.  It's hard to keep moving when you tire is low - at least efficiently.  It causes friction and you waste energy.  (Which kind of explains Washington, DC.)
 
 
The Sequester is a bad piece of management.  The parties involved simply gambled that the odds might turn in their favor after the election or that the cuts were so deep that the other side would never allow them to happen.  It's like holding your breath to solve a dispute, rather than trying to actually work on the issues at hand.
 
Agreed, we might be operating in a case where the economic “tire” is overinflated with government spending, but if you were given the choice between a blowout and a slow leak and asked to make a bet on making your next destination, my guess is most people would take the steadier pace, even if it proved to be a nuisance over a longer period of time.  There are simply more options when you are still mobile and not broken down by the side of the road.
 
The problem is our economy is not filled with air.  It is filled with jobs and it represents our citizen's ability to sustain themselves.  Approximately 8% of all working people are employed by the government.  Federal spending has represented 36 - 40% of our GDP for the last decade or so.  If you turn off that spending, that is a lot of money that will not flow out in to the economy.  The tire deflates, the patches come off and we end up with another stand-off, random budget and service cuts or worse.
 
Where Did All the Taxes Go?
 
Despite the apparent return of economic activity to respectable, if not historic levels, in the last four years, US tax revenues have stayed relatively flat.  If people and companies are making money again, shouldn't they be paying more taxes?
 
One part of the explanation is that there were a lot of incentives laid out in the first Obama term to spur spending in areas like capital projects and education.  Many of these incentives, which are often in the form of tax breaks or favorable accounting treatments for investments, are about to run their course and more normal tax rates may return.  But there might be more to it, as well.
 
During the 2012 Election, there was a very short burst of interest in off-shore accounts, due in part to Mitt Romney's holdings in the Cayman Islands and other tax havens.   The editors of the Economist magazine recently estimated that the equivalent of $20 trillion has been taken out of circulation over the last couple decades due to the use of tax havens by large multi-nationals and very rich individuals.  I have mentioned before that the company I worked for in Europe was incorporated on the Isle of Jersey and I was technically employed there.  It is a huge loophole, a lucrative one and one simply not available to everyone. 
 
Applying a range of common tax rates, this money might have earned several trillion dollars for the empty tax coffers of America and other developed countries - or even multiples of that if the money was truly in circulation for useful purposes, instead of being on house arrest in an offshore account.  This isn't a group of people enjoying the fruits of their hard work by buying an island vacation; this is a gaggle of robber barons that have found a way to stash cash, making them feel rich while effectively removing it from the economy that the rest of us work in.
 
Two changes might make a real difference here.  First, it would be nice if the US Government would only procure its goods and services from US companies, but that is probably impractical at this point.  If, however, we made a rule in which we only did business with companies that were registered in countries with which we have tax treaties, it would tighten things up a lot.  Goodbye Halliburton, which runs much of its business through subsidiaries located in Bermuda, the Cayman Islands and other tax havens. 
 
A more aggressive policy would be a “zero tolerance” for money passing through a tax haven, permanently marking these funds as suspect or devalued.  We could simply crack down on transfers of funds to and from an account located in a tax haven.  Go hide money if you want, but you are going to eventually have as much trouble spending or even explaining it as a working class criminal who just made a big heist.  If we identified any funds that pass through a tax haven as dirty money and treat it like any other laundered funds, the practice would stop pretty quickly.
 
These Aren't Just Numbers
 
There simply is not a short term solution to the American financial conundrum.  We are lucky that we print the currency of choice for global transactions.  Thanks to the ability of the Federal Reserve to keep up a steady supply of fresh money, the US Dollar is actually in reasonably good shape.  Like I stated at the outset of the article, the stock market is at a record level so, by traditional measures, the economy - on average -might be described as fairly healthy given what it has been through.
 
But that's the problem.  The US, as cohesive as we manage to be, is not really one entity.  It is a collection if individuals, not accumulation of averages.   If one guy makes nothing, another makes $100K and a third $2.9 million, they technically averaged $1 million apiece, but that average was kind of hard for the first two guys to spend.
 
Make no mistake; if the Sequester is allowed to unfold, people are going to lose their jobs.  These will be friends, neighbors, customers … and the only allies we have in the fight to continue the prosperity we have all come to expect as the end result of pursuing the American dream.   It can't be what any of our sitting politicians want to see happen.  It can't be what the news networks want to happen, no matter how compelling bread lines would be on TV.  Let's hope that the news gets better, soon.

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