Economy / Fiscal policy / Politics / U.S. Domestic Policy

The Sequester: Why Lawmakers Need to Act Now

Remember that debt limit fiasco last summer? Its repercussions still haunt us today. In order to motivate congress to come up with a cohesive debt reduction plan, the law passed to increase the debt limit stipulated that if the “super committee” failed to pass a plan by November 2011, across the board cuts (referred to as a sequestration) would take place in defense and non-defense discretionary spending to reduce the debt by $1.2 trillion over the next decade. We’re well past November and now the federal government faces $110 billion in automatic annual reductions starting on January 2nd.

With across the board cuts, the sequester is the opposite of tactful. In defense programs, military authority is not able to phase out old cold war technology in favor of new military capacity. Instead they must cut both equally. In non-defense discretionary programs, the cuts will mainly translate to a multitude of layoffs in both public and private sectors. The Bipartisan Policy Committee estimates that in total, the sequester will reduce America’s GDP by half a percent in 2013 and will make America lose more than one million jobs over the next two years. Since the government relies so heavily on private contractors, the majority of that job loss will be in the private sector.

On top of that, the Bipartisan Policy Committee notes that since the sequester does not address the major sources of U.S. debt (mandatory spending and low revenues), it doesn’t even reduce the debt. It only slightly delays its growth. For instance, debt held by the public will still hit 100 percent of GDP, but only 2 years later than it would if current spending and revenue trends persisted.

So, should we get rid of the sequester? Absolutely. But, we cannot do so without replacing it with more effective debt reduction plans. The S&P already downgraded America once because it didn’t believe we had the political backbone to tackle our debt. Not replacing the sequester with a better debt reduction plan would prove them right and credit agencies would probably downgrade us again. The main source of US debt is a combination of high mandatory spending and low revenues. So the simple answer is to start curbing entitlement programs, increasing government revenues, or pursuing some combination of the two.

The debt being such a sensitive and partisan issue, can Congress wait until after the election? Absolutely not. The sequester is already taking it’s toll on our economy and we need a clear and decisive plan now. Since agencies don’t know if they will have a certain level of funding at the beginning of the year, they are signing fewer contracts and hiring fewer businesses to carryout their tasks. In addition, because of the WARN Act, all businesses with 100 or more workers are required to notify their employees 60 days before potential layoffs. 60 days before January 2nd happens to be November 3rd. So only 3 days before the election, countless workers will receive letters in the mail stating that they may or may not be laid off at the beginning of the year. This would only lead to further uncertainty and add to the sequester’s economic fallout before it even takes place. Clearly, this is a situation every politician should want to avoid.