2/27/2013 6:30 PM ET|
Why there's no way Obama can win
Letting the budget cuts known as sequestration kick in could send the nation into recession, but a delay won't solve anything, either.
Like Captain Kirk and the Kobayashi Maru of Star Trek fame, President Barack Obama faces his own no-win scenario with the budget sequestration due to kick in on Friday.
Created as part of the 2011 debt ceiling deal, and activated by the failure of the congressional supercommittee to find an alternative budget deal, the sequester will slash $1.2 trillion off the federal budget over the next 10 years, split between defense and discretionary spending and without touching entitlements.
It's not Armageddon: The cuts are worth an average of 7% of total spending in these two areas and are a drop in the bucket compared with the $44 trillion Washington is set to spend over the next 10 years.
But it's not insignificant, either: It'll slash at least 0.5% off growth of gross domestic product this year -- at a time when much of the rich world is falling into recession.
Unfortunately, no matter what Obama does -- and, by extension, what Congress does -- it's not going to be good. Here's why, and how investors can prepare.
Take the hit?
For Obama, and indeed for all of us, it doesn't look like this is going to end well. You can see that in the way Washington has gone from looking at ways to avoid or modify the sequester -- by, for instance, giving government agencies the flexibility to make the cuts efficiently -- to figuring out how to blame each other for what's about to happen.
Obama has held campaign-style rallies surrounded by first responders facing job cuts while members of his Cabinet, from transportation to agriculture, have been sounding dire warnings about the consequences of the cuts. Republicans' defense has hinged on the fact that the idea for the sequester came from Obama's team, and that he personally signed off on it, according to reports. (Of course, Congress approved it, too.)
That's because while spending cuts are needed, the sequester goes about them in a pretty stupid way: It freezes the way agencies allocate spending among programs, projects and activities. As a result, planned spending for the overhaul of the USS Abraham Lincoln would be cut by 72% while spending on M1 Abrams tanks would increase 442%.
If the cuts go through, they could push the U.S. economy into an outright recession. While the total size of the sequester is fairly small, its impact is anything but. With quarterly GDP growth bouncing between positive and negative territory lately, it won't take much of a push to unlock all the negative accelerants that deepen new recessions: lost confidence, reduced business spending, lost wages, fewer jobs and lower consumer spending.
In fact, research from the International Monetary Fund suggests that, if the U.S. economy is indeed already in the early stages of a new recession, the drag from the budget sequester could be as large as 1% of GDP. Combined with the ongoing economic hit from the New Year's Day fiscal cliff deal, and the higher taxes that resulted, any further Washington belt-tightening would represent a serious and growing drag on growth.
Moreover, if we do fall into recession, the budget math will deteriorate, since a weaker economy means more spending on things like unemployment benefits combined with lower tax revenues as people lose income and cut spending.
But Obama can't simply work toward postponing or canceling the cuts, either. For one, given that the fiscal cliff deal raised $620 billion in new tax revenues, and given that higher spending (mainly on health care) is the root cause of the terrible long-term budget outlook, it's time to look at trimming the size of government. (Of course, if you support still-higher taxes, those will impact GDP, too.)
Two, the national debt is already approaching the point of no return, with economists warning the U.S. Monetary Policy Forum that we're on the cusp of a self-reinforcing "debt trap" that would be difficult to escape. (Download that Initiative on Global Markets report as a .pdf file.) Separate research has already shown that higher government debt levels are associated with less economic vigor, slower growth and a lower standard of living. (Read the Committee for a Responsible Federal Budget's report.)
And three, it's worth remembering that the sequester is the result of Washington's unwillingness to address the real problem: underfunded entitlement programs that are overpaying, by global standards, for health care that is often mediocre. If we can't find agreement soon, we risk attracting further ire from the credit-rating agencies that unleashed the August 2011 market meltdown after Standard & Poor's cut our AAA rating.
All this represents just the latest chapter of Obama's multi-episode budget battle with Congress. A new budget is needed by March 27 under the threat of a possible government shutdown. If budgets aren't passed by both chambers of Congress by April 15, members of that body would have their paychecks trapped in escrow. And if no deal is found by mid-May, the debt ceiling -- and the risk of a default on the national debt -- would be back in play.
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The Dems got a tax increase 7 weeks ago. Now they want ANOTHER tax increase just a few weeks later. Money is a funny thing - you can ALWAYS spend more than you've actually got, always asking for more is not the answer.
The government is like a lottery winner with poor money management skills. We've all read about them, they get a hundred million dollar jackpot, and a couple years later, they're broke again. That's the way our government operates- - no matter how much they take from us, they spend that AND THEN SOME, always wanting more more more. ENOUGH ALREADY - LET THE CUTS GO THROUGH!!!
I find it so hard to comprehend how so many can be fooled by this demagogue! He promotes nothing but divisiveness in America (but then what can you expect from someone who's playbook was Saul Alinsky's "Rules for Radicals").
His actions and rhetoric have brought about class warfare, race warfare and a host of other problems. One truth that has come out is that half of this nation are f*****g idiots!
If the Democrats want to welsh on their deal, then all of Obama's tax increases need to be rolled back... spending needs to be cut FAR more. Hopefully sat the end of March we can slash another 85 billion out of the budget. There should be NO WAY that the House will pass a continuing resolution without additional cut.
Obama got his MASSIVE tax increases, now it is time to cut HIS massive spending. We spent 2.9 trillion in 2008, now we are spending 3.8 trillion, ALL of it Obama's NEW Spending. Obama is a Lazy, Arrogant, CORRUPT, economically clueless Imbecile...
The American economy will really tank once all of Obama's massive tax increases slam on the economic brakes, and his Obamacare sends us into a depression.
Forget the government. How do the people say "No more spending increases. No more tax increases. Cut spending. Balance the budget. Bring down the deficit. Kill the FED." mean it, and have it stick?
No more distractions until the government has resolved the above.
That means stopping with the distractions like gun control, immigration, public and private pensions, out-sourcing, in-sourcing, globalization, abortion, voting rights, birth control, condoms in the classroom, Planned Parenthood, Social Security, Medicare, Medicaid, bailing out Europe, engaging in anymore wars, messing with the Amendments. Leave the Bill of Rights and the Consitution alone.
Unfunded liabilities threatens the countries finances.
Social Security, Medicare, and Medicaid, public employee pensions are a large part of the unfunded liabilities.
Unemployment and welfare benefits may be a little too generous and provide a disincentive to work.
Step 1) Have a realistic budget and pass it..
Step 2) Stay within or even God forbid under that budget. There will be no "Debt Cieling" or "Sequester" because there will be a budget.
Step 3) Both sides will now have the time to actually govern and pass laws and get back to what they are supposed to do in Washington.. Sorry but you can not blame the republicans when the President couldnt propose a realistic budget when he controlled both houses of congress.. H is the first sitting President to not pass a budget in his first term.. Good thing the media is on this..
MADDCOW PMSNBC IS DOING A STORY ON RACE! WHAT A SHOCK! NOTHING ABOUT OBAMA'S LYING SEQUESTER RANTS!
MORE RACE HATE CRAP! NOTHING BUT COMMUNIST! NBC!
The whole point is.....If federal budget cuts are going to affect the economy in such a huge and negative way, the private - public sector is TOO LOPSIDED. If we do not do something now, the tables will never turn until a revolution in the not to distant future occurs.
The president can instill fear regarding job cuts all he wants, the truth is the first responders etc are not the first needed to be cut or the ones which will be cut. The old saying of 'no pain no gain' could not be any more significant than it is right now. The cuts need to start today, and legislation needs to change the way government does business to put it on level playing field with private enterprise practices. The long history of government spending habits are the reason for inflation to begin with.
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