Personal Wealth Management / Politics

11th Hour Sequestration Politics

The sequester likely has little overall economic impact—and may in fact be useful to both parties.

Some facts about the sequestration, slated to start on March 1.

  • It’s not automatic or unavoidable. New legislation can move, end or alter the sequestration. Anything can and may happen, even at the 11th hour.
  • If the sequestration happens, total government spending is nowprojected to increase in 2013 (by $15 billion)*—not decrease. And total spending is projected to increase every year thereafter. The “cuts” were only to future spending growth rate projections.
  • Discretionary spending is projected to fall -$78 billion in 2013, more than offset by $85 billion in mandatory spending increases. (Add interest costs to get the $15 billion increase.)
  • These figures are all relative peanuts compared to America’s ~$16 trillion economy.
  • Much of the discretionary spending cuts are aimed at defense spending, and some industries may face layoffs. This is unfortunate but also what has happened during the entirety of the current expansion. The government has shed 712,000 jobs while the private sector has added nearly 5 million.
  • Under sequestration, military spending will match 2006 levels (while the US was fighting two hot wars). And in 2013, the US is projected to spend more than it did in 1985—a peak year for Cold War spending. (All figures inflation-adjusted.)
  • From a capital markets and macro-economic standpoint, the overall sequester impact will be small (if detectable) and limited to narrow industries.
  • This is, therefore and foremost, a political issue.

So let’s discuss the political fallout—and why, unlike the fiscal fungible cliff, the sequester is more likely to play out.

Republicans, (most of them), aren’t cheering the cuts, but they certainly aren’t opposed. First, it gives them political cover for the fiscal cliff tax deal they made on January 1 and buys them some capital with constituents to compromise during the looming debt ceiling debate.

Second, if the sequester happens and there’s no great economic reckoning (likely), that bolsters their fiscal cred with their base ahead of the 2014 midterms. There undoubtedly will be anecdotes about furloughed employees and longer security waits at airports (which no one wants). But if the economy keeps growing (likely) and unemployment keeps dropping (also likely), it may prove more tempting for the president and Democratic Senate majority to emphasize improvements rather than deny them to score political points.

If the sequester turns out badly on a macro-economic level (unlikely—but anything is possible), that would be bad for Republicans but potentially becomes a wedge issue for Democrats during midterms.

And in that sense, politically, the sequester could be a win-win-win for the Democrats. (Whether or not they see it that way we can’t say. Our calls to congress are for some reason studiously ignored.) If it’s delayed or altered, the Democrats can look as though they labored while the Republicans fiddled.

If the sequester happens and things go awry, the Democrats get the blame-game angle. But should things go just fine, recall, the sequester idea originated with the White House. President Obama can say he led on a tough issue that wasn’t popular with his party. And during mid-terms he can campaign on the further work that needs to be done, and he and his party want to play ball, but those pesky Republicans just want to play partisan games, etc., etc.

Either way, we’ll have some clarity on Friday—a kicked can, an altered sequester or a sequester in full effect. And either way, there’s likely little overall economic impact.

* Source: The Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2013 to 2023. Government spending was previously projected to fall by -$9 billion, but the latest update projects a $15 billion increase.

If you would like to contact the editors responsible for this article, please message MarketMinder directly.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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