So far, the effects have been minimal. Indeed, Wall Street largely ignored the sequester, viewing it as little more than an inconvenience (the Dow reached an all time high just four days after the sequester was enacted). However, this short-term growth is far from indicative of the actual health of the economy. The Congressional Budget Office estimates that, if the sequester had not occurred, the GDP would grow 0.6 percent faster and 750,000 jobs would be created or retained. To conclude that the supposed doomsday had been avoided, then, would be premature.
But behind all the overblown rhetoric and the political calculus of the crisis, there lies a fundamentally flawed policy. In an attempt to make the sequester politically unfeasible for both Democrats and Republicans, defense programs and social programs equally bore the brunt of the costs. However, the politically unfeasible has become reality and now we must begin cutting programs across the board. Among other programs, extended unemployment insurance, veterans’ benefits, and access to HeadStart preschools will be limited due to proposed cuts.
If we are going to make difficult cuts, they should at least be rooted in sound economic policy. The current narrative sees debt as ballooning wildly out of control, pressuring officials into immediately reducing the debt. If we do not take action right now, according to this narrative, interest payments will slowly overwhelm our GDP. The U.S., in turn, will eventually face a scenario where the government’s ability to pay is called into question, interest rates will skyrocket, and the government will be unable to service its debt and will go into default. The cost of the default will be born by future generations, who will be paying for the excesses of the present.
There can be little doubt that the debt needs to be reduced—however, not in this time frame proposed by the sequester. Had we fallen off the fiscal cliff, the debt would have been reduced radically —but the economy would have been dramatically slowed in the process. In light of high unemployment and last quarter’s dismal GDP growth, a Keynesian would call for increased deficit spending and monetary expansion. The Federal Reserve is taking care of the monetary expansion part by keeping interest rates at record lows. But how can we increase deficit spending while keeping our commitment to reducing the debt?
The answer goes back to those difficult cuts. Rather than force government agencies to arbitrarily cut funding across the board, we should be targeting the thing that contributes the most to our debt: our skyrocketing medical costs. This would include malpractice reform, which would get rid of more inefficiency and waste than the sequester supposedly eliminates. Ideally, the health insurance marketplaces would create competition against the outdated employer model of health insurance, allowing the unemployed and those in low-income jobs to obtain the care that they need. With increased access to health insurance, fewer people would use the emergency room as their primary source of care, driving down costs for everyone. Targeted, specific cuts will accomplish more than sharing the pain across agencies will.
Ultimately, the sequester was a clumsy approach to solving the debt problem with more potential for harm than good. We still have high unemployment, high medical costs, and a broken tax code. As Congress turns its attention to passing the budget later this month, I hope they think less about scoring political points and more about the serious problems that are ignored in favor of this political farce.