Monday, March 4, 2013

The "sequester" doesn't cut spending at all

If there is one explanation for why the equity market is rising despite the onset of what those on the left are calling a draconian cut in goverment spending, it is that the "sequester" that was triggered the other day doesn't cut spending at all. It merely slows the growth of government spending by a tiny amount. Dan Mitchell of the Cato Institute did a good job of illustrating this in a post a month ago, titled "Exposing the Absurdity of Washington's Anti-Sequester Hysteria."

He notes: "As you can see from this chart, the sequester will 'cut' spending so much that the budget will grow by 'only' $2.4 trillion over the next 10 years."

Even with the sequester, federal government spending will rise this year, and it is scheduled to rise every year for as far as the eye can see. This is a "cut" only in the Alice in Wonderland world of budget-speak.

Investors are usually smart enough to see through the smoke and mirrors, and what they see is a slowing in the growth of government spending: something that is badly needed and long overdue, but nevertheless a step in the right direction.

As a reminder of where we stand when it comes to federal spending, I repost the following two charts:

The battle that is being waged to slow the growth of government spending has actually been going on for the past four years, so this latest skirmish is nothing new. As the second of the above two charts shows, federal spending has already shrunk considerably relative to the economy, but it remains historically very high. If the very high levels of federal spending in the past four years failed to create a robust economy, then lower levels could arguably be a much-needed stimulus. Government spends money less efficiently than the private sector, so shrinking the size of government gives the private sector more breathing room and that in turn should create a stronger, healthier economy. It's a slow process, but we are making progress.


Gloeschi said...

Amazed at the logic of lower spending = good for economy.

If you had listened to Obama you would have realized that the 'hysteria' is intended to wake up slumbering citizens to exert pressure on members of Congress to achieve a deal.

So Druckenmiller is also spreading 'hysteria' when he talk about $211 trillion unfunded liabilities?

When do you think is the time to act? Not before a quadrillion?

brodero said...

from Merrill...

"After repeated warnings about dire outcomes, the delays in the spending cuts
could lull the markets into thinking that the sequester’s impact is not that big. The
danger is that once budget units finish planning; they will have a shorter period of
time to actually implement them. This will heighten the economic impact over the
April-June period.
Certain high frequency economic indicators will be more sensitive to the
sequester’s cuts. We believe that the following indicators are most vulnerable:
jobless claims, private payrolls, consumer confidence, manufacturing sentiment
surveys and the durable goods orders report. Gauging the timing and magnitude
of the sequester on the high frequency data is difficult."

William McKibbin said...

"The 'sequester' doesn't cut spending at all" -- I agree -- that's why I am certain that austerity has or will fail -- I would like to see government spending cut immediately by 40% in order to balance the budget -- but, that's not going to happen -- since austerity has failed, that leaves only outright default and monetary expansion leading to inflation as the ways forward -- the Fed has already committed to QE3 for eternity, and QE4 followed sooner thereafter -- said another way, inflation is on the radar -- maybe not this year -- maybe not this decade -- but, inflation is coming -- that's life on Earth.

William McKibbin said...

PS: The most important question today is how to protect yourself from the ravages of inflation -- my continuing advice is to acquire world-class skills that earn premium wages, and convert those wages in dividend and rent-earning equities that will become your estate over a lifetime -- that's my best advice for anyone alive on Earth today -- good luck!

Benjamin said...

The Fed is what counts.

The Fed can get the economy going--sheesh, with inflation at microscopic historic lows, they have room to run at the Fed like they never had before.

Dick Armey, Tea Part Chieftain, once noted:

"President Obama is not cutting a single dime out of the military budget. He is actually substantially increasing military spending over the next several years. Washington has once again cleverly disguised a spending increase as a "cut."
This is how it all works: the Congressional Budget Office (CBO) has a baseline that predicts what will happen over the next decade given current projections of taxation and spending. It shows that military spending will dramatically increase over the next ten years.
President Obama's $480 billion in military spending "cuts" are only from the bloated CBO baseline. This means that he is merely reducing projected military spending, as opposed to cutting current spending....
... Some Republican lawmakers such as Rep. Howard P. "Buck" McKeon (Calif.) called the nonexistent cuts "dangerous and irresponsible."
How much of an increase in military spending will satisfy them? It's interesting to note that Rep. McKeon's top campaign contributors include Lockheed Martin, Northrop Grumman, Boeing Co., and General Dynamics. These defense contractors lobby for more military spending that would add to their company's bottom line."

I do not fear lower federal pending.

Sheesh, real defense outlays have doubled since 9/11. all because 24 Saudi Arabians, armed with box-cutter, hijacked two airliners.

Some cuts would be good for American prosperity and American taxpayers, and this nation's true interests.

marmico said...

Sequestration cuts actual (nominal) discretionary spending through fiscal 2014.

Peak discretionary spending was $1.35 trillion (T) in 2011.
2012 discretionary was $1.29T and2014 is estimated by the CBO at $1.17T.

As you may or may not know, sequestration was directed primarily at discretionary not mandatory spending.

Donny Baseball said...

"Lower spending=good for economy" ought to clarified. For those of us who do not believe in Keynesian nonsense the actual identity function is "lower government spending=good for economy"

Thomas Watson said...

Well said. I couldn't agree with you more.