On Friday, if Barack Obama and the Republicans in Congress do not cut a deal, the US government will have to reduce its spending by $85bn. This could well derail the America’s fragile economic recovery, cost 700,000 jobs and lop 0.5 per cent off next year’s GDP. These spending cuts, known as the sequester, are significant: the Pentagon’s budget will fall by about 8 per cent, domestic discretionary spending by about 5 per cent. Airports will face delays, as the Federal Aviation Administration closes around 100 air traffic control towers. Education, infrastructure and healthcare will all take a big hit. Only the entitlement programmes like Social Security and Medicaid are exempt.
You may well yawn. You have heard this story before. And like the various fiscal cliffs that seem to loom perpetually, this is yet another idiotic, self-inflicted wound that might just go away. However, if Republicans spurn a deal and Obama plays his cards right, this could be a big victory for the Democrats. Ever since Ronald Reagan joked that “the nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help,’” railing against big government has been a vote winner. The sequester could change that.
When Obama and the Republicans negotiated the debt ceiling increase in 2011, they kicked the deficit cutting can down the road. They decided that if they could not agree on spending cuts and tax hikes by 1st March 2013, across the board spending cuts of $1.2 trillion over the next ten years would automatically take effect. The sequester was designed to spread these cuts over programmes popular with each party. With this unpalatable and inevitable prospect ahead, it was thought that both Republicans and Democrats would pull their fingers out and make a deal. This underestimated the sclerotic nature of the American political system and the right’s hatred for government spending.
Right now, most Americans aren’t focusing on the sequester. It seems like something happening far away that won’t have any effect on them. Once it hits, however, it will get their attention. And they are likely to blame the Republicans— after all, they are generally thought of as the party more inclined to shut down government. When airport delays become endemic, when pre-school education programmes are eliminated and when the economy slows unnecessarily, it might remind Americans that government does in fact have a purpose.
The saddest thing is that this episode is utterly unnecessary. The budget deficit is already declining both nominally and as a share of GDP. These days just about everybody but George Osborne and the Bundesbank recognises that cutting government spending during a recession is a prescription for pain. Austerity has been tried and it has failed. Washington kowtows much less to the deficit hawks than it did in 2011, when the sequester was first proposed. If the Republicans don’t make a deal soon, Obama will have a magnificent opportunity to show voters that cutting government isn’t a panacea. Sometimes it is a mistake.