The Sequester: What the President Should Do – But Won’t – Money Morning

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It’s just days before the $85 billion in across-the-board spending cuts known as sequester are set to kick in and the Obama administration says the reductions would drastically hurt essential programs, including national defense, education and medical research.

Republicans, meanwhile, maintain that U.S. President Barack Obama doesn’t recognize the problem isn’t the sequester.

It’s “an excessive, bloated, big federal government that’s highly inefficient and highly ineffective,” according to Sen. Tom Coburn, R-OK, on FOX News Sunday.

While Coburn said he would rein in spending through a different method than the sequester, some GOP lawmakers are ready to let the automatic spending cuts take effect in their current form.

As Money Morning Global Investing Strategist Martin Hutchinson explained in the accompanying video, the sequester should have been made part of a long-term deficit reduction plan.

“In an ideal world it would be part of a four-stage program to solve the deficit problem… the problem is I don’t think the president really wants to do that,” said Hutchinson.

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Hutchinson outlines in the attached video the four-step approach the government should have taken to deal with the deficit, and gives his prediction for what we can expect as the sequester battle plays out this week.

 



Why Spending Cuts are Necessary

The federal debt is expected to swell to some $18.5 trillion, or nearly $30,000 per American, by the end of President Obama’s second term. And the president continues to lobby for increased federal spending amid an anemic economy that’s crippled by high unemployment and stagnant wages.

That kind of spending cannot continue without consequences. So forced spending cuts could have an upside.

“The most basic truth of modern politics is that action happens only in response to crisis. (That may not be the politics we want, but it’s definitely the politics we have.) The sequester may not be that crisis – maybe it’s the debt ceiling fight to come later this summer – but if it is, that’s probably a good thing for people who want things to change in some meaningful way,” Chris Cillizza and Aaron Blake wrote in The Washington Post.

“Short of a crisis, the sort of kick-the-can-ism that has dominated the last decade or more in politics will continue ad infinitum.”

Sequester could be the “crisis” that thrusts Congress into immediate action. It should also prompt Americans to recognize the fiscal predicaments the country faces and the troubled future we are leaving to future generations.

Impacts of Sequester and Spending Cuts on U.S. Economy

Team Obama has raised a media ruckus warning of dire consequences if Congress doesn’t avert the automatic spending cuts through a blend of spending reductions and tax increases.

But Coburn downplayed the sequester’s effects.

“The crisis is made up, it’s been created,” he said.

Amounting to just 2% of the federal budget, the $85 billion in cuts wouldn’t inflict the amount of pain Democrats say they would. Budget hawks point out $85 billion represents a mere 0.5% of gross domestic product.

In the Defense Department budget, with some tweaking, Congress could avoid numerous layoffs and furloughs, cutbacks in training and equipment spending, and significant reductions in investments for weapons programs.

The Obama administration could also do some creative maneuvering that would spare cuts to Medicaid, airport security and mental health programs.

“There’s easy ways to cut this money that the American people will not feel. What you hear is an outrage because nobody wants to cut spending,” Coburn said. “It will be somewhat painful, but not cutting spending is going to be disastrous for our country.”

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