THE NEW NORMAL OCTOBER 18, 2013
It was an awful time. Federal employees had to take unpaid furlough days. Beneficiaries were thrown off of federal programs. Courthouses had to be sold. Federal agencies like the FBI, the Food and Drug Administration, and the National Institutes of Health strained to meet commitments, leading to more crime, more outbreaks of disease and less basic research, among other horrors.
This may sound like a description of the recent government shutdown, which ended October 16. But this describes the fallout from sequestration, the across-the-board cuts to discretionary spending that took effect March 1—arbitrary reductions that closely parallel the effects of the shutdown. In fact, depending on where you want to draw the line, the United States has been mired in an entrenched partial government shutdown for about four years, which has severely limited federal resources, put millions out of work, and served as a primary driver of our sclerotic recovery from the Great Recession. And while the recent appropriations lapse lasted just 16 days, this broader shutdown is poised to drag on for at least a decade. Sequestration and artificial spending caps have become the new normal, and it’s redefining the role of government, rolling back the ambitions of the past, and constraining needed investments in the future. So let's call it what it is: a government shutdown that's infinitely worse than the one that just ended.
You could argue that the recent shutdown inflicted much more damage than sequestration. You would be wrong. Standard and Poor’s estimated that the shutdown cost the economy $24 billion over its 16-day stretch. Sequestration, meanwhile, will be in place for ten years unless Congress does something, and the spending cuts over that time total $1.2 trillion—50 times the economic impact of the shutdown. And that doesn’t include the knock-on effects to the economy—reduced purchasing power by federal employees, fewer contracts for private companies doing business with the government, and generally lower consumer spending as a result. According to the Congressional Budget Office, sequestration cuts will cost as much as 1.6 million jobs if kept in place through the 2014 fiscal year, with a reduction in GDP of 0.7 percent. The continuing resolution funds the government at sequestration levels through January 15, 2014, so we’re well on our way. As veteran Congressional observer Norm Ornstein wrote, “Damaging as the shutdown is for governance, it is minor compared with the long-term damage of the sequester.”
Starting in FY 2014, sequestration acts less like an across-the-board cut and more like an artificial spending cap. This theoretically limits the damage, as appropriators can shuffle funds to preferred programs and phase out wasteful or unnecessary ones. But spending caps are just as damaging. Ask anyone in Colorado who managed to survive the 1992 “Taxpayers Bill of Rights (TABOR).” Voters approved a measure that year which capped spending at an inflation-adjusted per capita rate, refunding taxpayers any excess revenue collected above that cap. State spending plummeted dramatically and services declined across the whole of government. Despite being a wealthy state, Colorado dropped to forty-ninth in the nation in K-12 spending, fiftieth in teacher salaries, forty-eigth in pre-natal care, fiftieth in vaccinations and forty-eigth in low-income residents with health insurance. It got so bad that Colorado business leaders pressured Republicans to end the permanent shrinkage of government, arguing that it hobbled the state over the long-term. “No business would survive if it were run like the TABOR faithful say Colorado should be run,” said Neil Westergaard, editor of the Denver Business Journal.
In 2006, Coloradans approved a referendum that suspended TABOR and ended this dangerous experiment with austerity. But Congress signed up for a TABOR-like regime in 2011 under the Budget Control Act. Not only does the $1.2 trillion in sequestration act as a spending cap, that goes on top of the BCA’s spending cap for fiscal years 2012-2021, which reduced discretionary spending by another $841 billion. If you add in the budget cuts made in April 2011, which both reduced spending and lowered the baseline for future spending, you would conclude, as the Center on Budget and Policy Priorities did, that the total effect of the 2012-2021 spending cap was $1.5 trillion. Combine that with sequestration, and you get $2.7 billion in cuts, contributing to a historically low discretionary funding level; if it persists, discretionary spending by 2038 will be lower as a share of the economy than any time since the 1930s.
We’re starting to understand the impact of this massive, long-term shutdown. The consulting firm Macroeconomic Advisers—in a study completed for the Peter Peterson Foundation, which actually supports long-term austerity—estimated that slashes to fiscal policy have lowered economic growth by one percent each year since 2010, with a combined loss of over two million jobs. This equals about $700 billion in wasted economic potential in three years. Paul Krugman argues this may understate the case: Premature pullbacks in spending like the 2011 payroll tax holiday and extended unemployment benefits certainly cost the country in jobs and economic growth as well.
This represents clear, self-inflicted damage, mostly achieved due to Republican control of one house of Congress. Their demands for smaller government have succeeded—the budget deficit has fallen at the most rapid pace since the demobilization following World War II—but it has come at a massive cost to the country’s economic fortunes. The economy was simply too fragile, with aggregate demand too low, to withstand the blow of shutting down the government. Unemployment would be far lower, and growth far higher, without these wounds.
And sadly enough, leading Democrats egged on the pivot to austerity, including President Barack Obama. Insufficient stimulus, measures like a federal employee pay freeze, and the inability to counter-balance forced budget cuts from the states led government policy to harm an economy that needed help. Indeed, Goldman Sachs’ macroeconomic analysis showed that federal fiscal policy—not just state and local—began to drag on growth in the middle of 2010, when Democrats still controlled Congress. That has been borne out by subsequent analyses, and it puts us in year four of an unnecessary, damaging partial government shutdown.
This won't end anytime soon. While the two parties have begun talks on a budget deal, few expect them to bear fruit. And even if it did, the effect would be negligible. All the energy among the parties is going toward replacing sequestration, not cancelling it. This means the macroeconomic impact of budget cutting is the same, if a bit more smartly targeted. And nobody’s saying a word about breaching the $1.5 trillion spending caps of the Budget Control Act. No Congress is bound by past Congresses, and this one could simply write a law changing the spending limits for the future. But the culture of deficit-obsessed Washington has pushed against that. Good ideas like a grand bargain for the economy, with a swap of Republican-sought tax cuts for a massive infrastructure spending program, are pipe dreams. Michael Linden of the Center for American Progress correctly points out that simply repealing the “harmful, shortsighted, and totally unnecessary” sequestration would be the optimal move, but “unfortunately, we do not live in that world yet.”
How do we get to that world? It will take a supreme effort—Republicans see drowning the government in the bathtub as a hard-won victory. But it starts by putting the fiscal policies of the past few years on the same footing as the madness of October, both of which constitute needless government shutdowns that sap away at our economy and increase human misery without much of a salutary purpose. Democrats have generally been too timid to call this out; they reacted to the shutdown by agreeing early on to the sequestration-enforced spending limits in a continuing resolution. Obama and his allies continue to brag about deficit reduction and push for a fiscal deal that would lock in these spending limits. That’s wrong, and we'll all pay the price—with a lousy economy.