41 Billion Reasons Not to Sweat the Sequester: 2013 Cuts Are $44 Billion, Not $85 Billion.

courtesy John B. Taylorcourtesy John B. Taylor

Note: Taylor's website has changed since the original posting of this piece. His work is now available online here.

Economist John B. Taylor charts what sequestration will look like when it comes to federal spending levels. The short version: A lot like federal spending levels absent sequestration, which is widely reported as reducing outlays in FY2013 by about $85 billion or so.

The first thing to note is that the $85 billion figure that gets bandied about overstates this year's cuts due to sequestration by about $40 billion. According to the Congressional Budget Office (CBO) in its February 2013 report on the budget outlook, "Discretionary outlays will drop by $35 billion and mandatory spending will be reduced by $9 billion this year as a direct result of those procedures [sequestration]; additional reductions in outlays attributable to the cuts in 2013 funding will occur in later years."

You got that? When President Obama scaremongers about national parks closing and TSA lines getting longer - and when Republicans bitch and moan about the military having to set up bake sales to buy bombers - they are already misstating basic facts. The sequester will slice $44 billion off this year's budget, not $85 billion.

CBO figures that total spending in FY2013 will come to around $3.55 trillion (see table 1-1), or roughly the same as FY2012, when it came to $3.53 trillion. In 2014, assuming the sequester happens, CBO figures total spending will be $3.6 trillion before it jacks up considerably to $3.8 trillion in 2015 and then up to over $4 trillion in 2016. As Taylor's chart (above, right) shows, this isn't that very much different at all than what would happen absent sequestration. Taylor favors keeping the sequester but add the sensible proviso that the president and the Congress should allow all affected agencies to the flexibility "to adjust their budgets within the overall sequester totals." That blunts the criticism that the sequestration is itself too blunt an instrument.

courtesy John B. Taylorcourtesy John B. TaylorYou'll note in Taylor's chart a line marked "pro-growth reform," which is substantially lower than the the CBO baseline or spending "without sequester." Taylor explains that's the amount of spending that would happen if the government pursuied a "fiscal consolidation strategy" that reduced the debt-to-GDP ratio in a way that would return spending as a share of the economy to pre-crisis levels. In work done with John Cogan, Volker Wieland, Tobias Cwik, Taylor simulates the effects of cutting spending on the larger economy and finds that

The positive short run economic effects occur even in the model with price and wage rigidities for several reasons including that the lower spending (as a share of GDP) can reduce expected tax rates and raise permanent after-tax income compared to what would be expected under current policy. This stimulates consumption. The gradual nature of the government spending reduction, which allows time for private spending to adjust, avoids the negative aggregate demand effects that traditional Keynesian models emphasize. 

How does cutting government spending spur consumption and growth? After all, if we count most government spending in GDP, significant cuts to government spending will by definition shrink the economy, right? Taylor notes the incremental but believable cuts in spending signal to businesses and consumers that massive tax hikes or truly disruptive reductions in spending are less likely to happen. As a result, economic activity proceeds. An added bonus is that misallocated resources - more likely via government spending than by private actors - get freed up as well. 

That gap on the right-hand side of the chart (Figure 1, above right) between "Baseline" and "Fiscal Consolidation Strategy" is essentially another way of marking the huge price exacted on future economic growth by high levels of government spending and debt. As Veronique de Rugy and I have noted in various articles (like this one and this one), research by Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff argues that maintaining levels of gross debt greater than 90 percent of GDP for five years at a time reduces future economic growth by as much as 1 percentage point a year for 20-plus years. We've been in such a "debt overhang" situation since 2008 and the cumulative effect over the coming years will likely be substantial. In the chart to the right, the blue line represents expected economic growth when gross debt is lower than 90 percent of GDP and the red line shows reduced growth due to debt overhang.

Who exactly is up for having 24 percent less stuff in, say, 2036? Start building it into your retirement plans, because that's where we're heading if spending and debt patterns keep going the way they're headed. As the CBO illustrates it, there's really no scenario under current trends in which revenue catches up to spending.

CBOCBO


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  • $park¥||

    Wait, we can save $42.5 Trillion dollars?!?!?!

  • ||

  • Sevo||

    Hey! A T, a B; who cares?

  • Almanian!||

    "What Will Sequestration Really Look Like? To Start With, Cut $85 Trillion in Half."

    I wish. Half of $85 Trillion would be REAL progress!

  • Palin's Buttplug||

    Conservative IBD warns that the deficit is falling too fast:

    To be specific, CBO expects the deficit to shrink from 8.7% of GDP in fiscal 2011 to 5.3% in fiscal 2013 if the sequester takes effect and to 5.5% if it doesn't. Either way, the two-year deficit reduction — equal to 3.4% of the economy if automatic budget cuts are triggered and 3.2% if not — would stand far above any other fiscal tightening since World War II.

    Until the aftermath of the Great Recession, there were only three such periods in which the deficit shrank by a cumulative 2% of GDP or more. The 1960-61 and 1969-70 episodes both helped bring about a recession.

    Read More At IBD: http://news.investors.com/blog.....z2LNDujyKk

    And blames sequestration in part.

  • Almanian!||

    Good lord! WE can't have the deficit shrinking...TOO FAST!!! Chaos! Blood in the streets! Children eating old people! Metallica covering YMCA!

  • fish||

    Again Almanian...you don't travel in the same HIGH FINANCE circles as Shreeky! You probably shouldn't comment.

  • Enough About Palin||

    "Metallica covering YMCA!"

    I'd give that a listen.

  • ||

    No no no. It should be Dying Fetus.

  • Almanian!||

    Dying Fetus is covering "You Light Up My Life".

    EPIC dude...

  • Proprietist||

    Not like it could be much worse than the Lou Reed collaboration.

  • Almanian!||

    I haz a sad, but I no mai plays

  • Jordan||

    Either way, the two-year deficit reduction — equal to 3.4% of the economy if automatic budget cuts are triggered and 3.2% if not — would stand far above any other fiscal tightening since World War II.

    And? Keynesian derpconomists predicted DOOM then too. And they were proven to be spectacularly wrong.

  • ||

    Did you read the article? There's not even an attempt to explain the correlation between deficit reduction rate and recession. And it's not even a significant correlation if you look at their graph.

  • Palin's Buttplug||

    I said "conservative".

  • ||

    So you don't think the deficit is shrinking fast enough. Sorry, I misunderstood.

  • Brutus||

    GDP is a number that includes government spending. If G drops, GDP tends to drop, too. That doesn't mean the private sector is suffering, quite the opposite.

    Let GDP fall like a rock, so long as it's G that is falling.

  • some guy||

    The difference the sequestration makes would look even less impressive if you didn't suppress the origin in all your plots.

  • Sevo||

    Page isn't big enough...

  • some guy||

    Scale accordingly. You wouldn't be able to see a difference between the "with sequestration" and the "without sequestration" lines in the first plot.

  • Heroic Mulatto||

    With firefighters, police officers and other emergency responders standing behind him, Obama said that "people will lose their jobs" if the forced cuts are allowed to take effect.

    What a Fascist* piece of shit, Obama is.

    *And I do mean "Fascism" in its original sense of Mussolini's national syndicalism, as evidenced by the mob of public sector union cronies behind him.

  • ||

    Has Amtrak started running on time? I think not.

  • Almanian!||

    I think adding TSA agents to all trains and train stations will help.

    /thinking like a pubsectard

  • Heroic Mulatto||

    Has Amtrak started running on time? I think not.

    When Uncle Joe Biden is doing his daily Excela commute, you can damn well bet it does!

  • ||

    I got from LA to New Orleans an hour early in December. That was after leaving 4 hours late because some asshole decided that suicide by jumping in front of the Surfliner was a good idea and it was a connecting route.

  • Heroic Mulatto||

    *sigh*

    You know, jesse, I remember the days when I would respond to stories like that with, "Well, why didn't you just fly?"

  • ||

    My roommate was picking the dates and finding accommodation. She dithered so long that flight prices had doubled, and taking the train out became much more cost effective. We flew back because prices hadn't gone up very steeply for the return flight. Besides I enjoy train travel (very occasionally) you get to see the country, I took some great photos, and we brought considerable amounts of alcohol without anyone ever checking our bags.

  • Invisible Finger||

    What camps does Amtrak stop at?

  • fish||

    All the "Joycamps". Why do you ask?

  • John||

    It is always about firefighters and cops. Of course the feds fund very few firefighters and a relatively small percentage of the total number of cops in the country.

    What a lying piece of shit.

  • Almanian!||

    AND the teachers, John. Don't forget the TEACHERS, God bless their useless, unionized hearts.

  • John||

    Every tax dollar you pay goes to cops, firefighters, soldiers and teachers. What the hell kind of an unAmerican communist doesn't want to pay for that?

  • BakedPenguin||

    Todd Flanders: Daddy, what do taxes pay for?
    Ned Flanders: Oh, why, everything! Policemen, trees, sunshine! And lets not forget the folks who just don't feel like working, God bless 'em!

  • CE||

    throw in retired cops, firefighters, teachers and administrators, and you're pretty close.

  • SugarFree||

    The only funding the feds give locals cops is paramilitary armor and weapons they shouldn't have in the first place, or some vague block funding for the PC crime of the week.

  • John||

    I was thinking more of actual federal cops like CBP and the FBI.

  • SugarFree||

    I'd be really upset if the FBI didn't have the funding they need to investigate crimes that shouldn't be federal offenses in the first place. Which I think is about 95% of what they do at this point.

  • John||

    Who is else going to bust medical marijuana shops and imprison sick people for trolling for pain pills? What do you want this country to be? Somalia?

  • $park¥||

    Who is else going to bust medical marijuana shops and imprison sick people for trolling for pain pills?

    I suspect sick people are more likely to be trawling for pain pills rather than trolling for them.

  • ||

    Look, NutraSweet, ever since the Soviet Union collapsed their counterespionage agents have needed stuff to do.

  • fish||

    Yeah! It was awesome the way they cleaned up and arrested all the participants from the banking and real estate fraud.

  • Almanian!||

    All ur cops are belong to U.S.

    /Ur Federal Overlords LOL

  • Hugh Akston||

    Does that company sell shooting range targets with pictures of Republican legislators or citizens who don't want to pay higher taxes?

  • Brutus||

    Funny the Prezzydint doesn't have armies of Dept. of Commerce/Education/Energy/HUD/HHS/EA bureaucrats standing behind him, ever.

  • John||

    Who exactly is up for having 24 percent less stuff in, say, 2036?

    24 percent less stuff than we would have otherwise had.

    The sentence makes it sound like we will be 24% poorer in real terms compared to today rather than compared to what it could have been.

  • Almanian!||

    Oh - then it's OK!

    Hey, wait...

  • John||

    It is still not okay. But it is just deceiving. And worse still the same kind of deception that calls cuts in the growth of spending, cuts in spending.

  • TallDave||

    I doubt anyone remotely familiar with economics over time would have read it that way.

    Also, the preceding sentence explains it:

    "In the chart to the right, the blue line represents expected economic growth when gross debt is lower than 90 percent of GDP and the red line shows reduced growth due to debt overhang."

  • John||

    Yeah. But the next sentence doesn't make that clear at all. That is the one I am talking about.

  • Cavpitalist||

    Yeah. But the next sentence doesn't make that clear at all. That is the one I am talking about.

    Fuck context clues, or maintaining a thought after a period, I want my shit spoonfed to me while my nipples are rubbed, because fuck thinking.

  • Loki||

    "Why do keep trying to read... What are you, a fag?"

  • Emmerson Biggins||

    And the title of the article says "cuts are 44 billion". I think Nick is definitely one of the good guys. But we shouldn't retreat on this "meaning of the word cut" front. We should attack hard.

  • The Late P Brooks||

    I'm gonna move this up from an earlier thread:

    Just saw Obama's campaign event against the sequester.

    I made a desperate lunge for the channel changer thingy, but not before I noticed the careful placement of an attractive blond in a (I suspect) Fireperson's uniform just over his shoulder.

    What sort of monster would throw this poor delicate flower into the cruel streets, to demean herself by working for a profiteering capitalist, when she has devoted her life... HER LIFE, damn you... to helping people?

    Oh, it makes one weep for Humanity.

  • John||

    Go back sometime and look at the photo op Clinton did when he signed welfare reform. There is only black people standing behind him, including a very large black women right next to him that pretty much fits every nasty stereotype of the "welfare queen". It was the most overtly racist thing I have ever seen a President do. It really was Bubba telling white voters for the upcoming Presidential election "I just kicked all those lazy black people on welfare".

  • Sudden||

    I think the intended message is the opposite. When you're signing the bill into law, and it may threaten a core of your constituency, you parade in front of the cameras people who represent that threatened constituency so that those watching on tv will not feel that your bill threatens them.

  • John||

    That is what they meant for black people to see. But if a Republican had done that, it would have been all dog whistle.

  • ||

    In my shop, it looks like only the Fed gov employees will be looking at furloughs (although that could change - planning ain't the gubmint's strong suit). It being the long dark teatime of the soul known as BPD&MD; (Between President's Day and Memorial Day), I was kind looking forward to some unpaid vacay.

  • John||

    They are talking the same here. But I have to go to an Army course for two weeks in May. I am out of military leave and will have to take it unpaid. So I really don't give a shit. I am so rooting for sequester. It is not the massive RIF that turns Washington back into the crime infested poor city it used to be that we have all been hoping and praying for. But you take what you can get.

  • Matrix||

    We are under a hiring freeze, sending all temps hires back, and not resigning term employees. They are also talking about cutting back a lot of contractor jobs.

    We've been getting inquiries for VERA/VSIP. There hasn't been anything official, yet, regarding those.

  • SugarFree||

    Geez. I beg to be furloughed over the summer or dropped to 4 days a week. I'd be a dream come true.

  • $park¥||

    I'd be a dream come true.

    This will never happen. Ever.

  • Almanian!||

    YOU LIE!

  • John||

    http://www.cafemom.com/article.....0&non;_us=

    Look at that face and tell me Sugar Free isn't a dream come true.

  • Almanian!||

    I'd be a dream come true.

    You mean even MORE of a dream come true, Aspartame. Even MORE of a dream...

  • SugarFree||

    The Consonant Thief stole my "t".

    oa ou, ooa ei!

  • The Late P Brooks||

    Either way, the two-year deficit reduction — equal to 3.4% of the economy if automatic budget cuts are triggered and 3.2% if not — would stand far above any other fiscal tightening since World War II.

    Repent! The end is nigh!

  • CE||

    85 billion is 3.4 percent of a 20-trillion dollar economy? By my math, it's more like 0.4 percent.

  • Matrix||

    Well, they've already told us that we're getting furloughed 1 day a week for 22 weeks if sequestration goes through. There will also be many cuts to training activities and other support activities. It's not looking... fun.

  • John||

    The furloughs are totally stupid. If you have a budget problem you cut staff. That way your long term spending goes down. Furloughs just solve the problem this year. If you don't have the money for salaries this year, you won't next year either.

  • Matrix||

    They've already started cutting unfilled positions. Cutting positions will be difficult, considering the workload and their refusal to pay overtime/comp time.

  • John||

    That goes back to a lack of a budget. You cut spending by stopping doing some things not just across the board cutting everything.

  • CE||

    But is there anything the fedgov is doing that wouldn't be better left undone?

  • Matrix||

    plenty, but there's also plenty of things that need to be done. Doesn't necessarily mean it has to be the government that does it.

  • ||

    One of our Fed gov colleagues recently left, and I doubt they will hire to replace him. This is exactly as it should be.

    But, still, I want a furlough like I got at Fannie Mae. 2 weeks unpaid vacay during the holidays. Too bad the snow didn't arrive in VT that year until mid-January - I wanted to go skiing during my furlough.

  • John||

    I am not sure how they will do it here. I wouldn't be shocked if the dumb asses said you had to take it one day a week rather than all at once.

  • Matrix||

    I'd rather have it as 22 straight working days (roughly 1 month). It would likely be April, and would suit me very well, since my house won't be closed until probably the end of April. Plus I'm ahead on my car payment and have a bit of extra cash in the bank.

    But 20% of my pay for 11 straight pay checks will be tough. Will I make it? Yes, but barely.

  • John||

    Are they doing the full 22? Even DHS is looking at like 7 or maybe 14 depending.

  • Matrix||

    The memo we received a week or two back stated that it will be a furlough of 22 weeks. Came from General So-and-so. the CG of my immediate command has stated 'it's too early to tell'. Yeah... so worst case right now is 22 weeks of losing 1 day a week.

  • John||

    You are in DOD, they are getting it up the ass more.

  • Zeb||

    Yeah, well welcome to reality as experienced by the private sector for the past 4 years, you goddamn parasite. I've already been through that twice.

  • $park¥||

    The bulk of the work my company does is manufacturing for government contracts. Our shop is closing the end of June, putting ~250 people out of work.

  • Brandon||

    How many of the people here work for the feds?

  • Matrix||

    DoD here. Specifically Dept of Army as a logistician.

  • Lord Humungus||

    too many

  • Scooby||

    We all work for the feds for 4-6 months per year.

  • catmatmc||

    I live in Hampton Roads. The doom is thick 'round these parts.

  • TallDave||

    Great piece. Note too that CBO estimates of growth are probably optimistic.

    It would also help growth if we stopped basing monetary policy on CPI and instead used NGDP level targeting, aka market monetarism. This would have a number of salutary effects, most notably getting us out of so-called "liquidity traps" where CPI and NGDP diverge at ZLB to the point Fed policy becomes much too deflationary.

  • Cytotoxic||

    There is no liquidity trap or deflationary fed policy. NGDP is more brazen fraud.

  • Red Rocks Rockin||

    That's what I was thinking--when exactly has Fed policy ever been deflationary?

  • TallDave||

    RRR -- too deflationary, i.e. "not inflationary enough."

    It's really best to just ignore inflation altogether and target NGDP growth of 5% or so. That avoids the problems inherent in trying to figure out what inflation really means and basing monetary policy on the answer.

  • TallDave||

    NGDP can't be brazen fraud, it's determined by what people are actually willing to pay for things.

    CPI, otoh, is a doomed effort by gov't bureaucrats to boil down a multivariate, multidimensional concept into one meaningful number that applies to everyone, which we can call "inflation" and then use for COLA adjustments. It depends on a lot of witchcraft involving measuring hedonics and substitutions.

    If Fed policy weren't too deflationary right now, companies wouldn't be sitting on cash and the economy would be growing again.

  • Calidissident||

    Fed policy has been too deflationary? Companies aren't sitting on cash and not hiring because there's not enough money in existence. Printing paper and adding zeroes to bank accounts doesn't actually increase wealth

  • TallDave||

    It's not about printing paper, it's about managing expectations. Once the markets understand that the Fed is targeting a stable NGDP growth, they will behave in accordance and the various asset purchases can be unwound.

    Why are companies hoarding cash? Because cash is a good investment in deflationary times.

    Say's Law gets beat up a lot, but as a general rule it's true that 1) money has a time value and 2) consumption is necessarily limited by production. But seeking liquidity and storing value in cash makes sense when you perceive deflation.

  • Calidissident||

    There has not and will not be deflation. That is not why companies aren't expanding

  • TallDave||

    We have low nominal interest rates and yet lending is down and large companies want to sit on cash. That says investors see the environment as too deflationary (i.e. lenders see negative real returns at today's nominal rates).

    Keep in mind, NGDP level targeting is not generally an inflationary policy! It's more inflationary when real growth is slow and less when it is high. Thus it helps avoid both bubbles and so-called liquidity traps.

    One of the problems with inflation targeting is that it isn't a stable policy even if you have perfect knowledge about CPI, because when you run into things like oil shocks you're pretty much forced to abandon your inflation target. NGDPLT just handles this naturally -- "oh look, a nominal GDP shock, well let's increase monetary supply to stay nearer to our NGDP target." With inflation targeting you're never sure whether you're dealing with a shock or not, which is why the stock market now has a very strong correlation to whatever the Fed is doing.

  • CE||

    So, this 1.1% spending cut is what the president is calling "brutal"?

  • ezracolbert||

    Really simple calculation
    cut is 45 Bn
    50% is salary - either direct as gov't employee or contractor, or thru purchases from vendors
    do the math, it is a lot of jobs in a depresed economy, where the Unemplyment rate is 9-15%, depending on what set of numbers you believe in.

  • Sevo||

    "President Barack Obama lashed out against Republicans, saying they are unwilling to raise taxes to reduce deficits and warning that the jobs of essential government workers, from teachers to emergency responders, are on the line."

    Sounds like a feature to me.
    http://www.sfgate.com/news/pol.....289246.php

  • ezracolbert||

    About the idea that the sequester is actually 45 Bn in 2013, not 85
    I looked at the CBO report that taylor cites, and it is a bit confusing.
    numbers appear on the bottom of page 10, the top of page 11, and in table 1 on page 14
    some of the numbers say 85; those on page 11 say 45, but contradict themselves with table 1
    (a bit embarrassing for CBO is the best you can say - urge you to write your congressperson and complain about the sloppy report)

    anyway, can someone explain the discrpancy ?
    also, other news sources ,eg the N Y Times , are going with the 85 number, so, for our national sanity we need to get his straigthened out one way or the other, so we are not wasting time arguing about teh wrong thing

  • jessie||

    From the very same document that Nick cited as his source for the 44 billion figure. Page 14. Table 1-2.
    CBO’s Estimates of Automatic Spending Reductions for 2013

    Defense
    Discretionary 42.7B
    Mandatory (between 0 and 50 mil)
    ____
    Total 42.7

    Nondefense
    Discretionary 28.7

    Mandatory
    Medicare spending subject to 2 percent limit 9.9

    Other 4.0
    ____
    Total 42.7

    Total for Defense and non defense = 85.3.

    Nick, please explain where you got your numbers.

  • Duelles||

    Ther is no one left ( no pun intended) to vote for.
    I remember Jerry Ford talking down the base line budgeting when he became president.
    These people suck the life out of us and congratulate themselves. They bite the big one !!!

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