I am not an expert on the federal budget, so everyone should take what I say here in the proper critical spirit. Nevertheless, even the non-expert can formulate some relevant questions on the numbers that are being talked about in relation to the looming sequester, the mandatory budget cuts, soon to take effect, that were agreed upon by Congress and the President in a deal in 2011.
Many people, and the President above all, are saying that these cuts will be devastating to government, society, and the economy. It is hard to see how this can be.
Many of those who are worried about the sequester note that it requires $1.2 trillion in automatic spending cuts. This is a lot of money. Sometimes, however, they fail to observe that the $1.2 trillion is to be cut over ten years. I gather the government will spend about $3.8 trillion dollars this year. Project that over ten years and you get $38 trillion. So, on these numbers, the dreaded sequester represents about a 3% decrease in federal spending. Of course, however, the government in fact plans to spend more each year and not just the same amount that it spent this year, so the sequester will actually be even smaller than that.
What about the impact of the cuts to come now? There are varying reports about how much they would be. Some say $85 billion, but others say that in fact only about $40 billion could be cut in the first year. Let’s take the higher number, just to make the effect of the sequester as big as possible. It would amount to about 2% of the present spending. Can 2% less spending in the present year really devastate the government? Can $85 billion less in federal spending really materially hurt an economy of more than $15 trillion dollars?
What about the effect on national defense? A few days ago Defense Secretary Leon Panetta warned that the sequester cuts would seriously harm our military. About half the sequester is to come from defense, so make that about $43 billion. That would come out of defense spending that is more than $700 billion per year. That’s about 6%, and no administrator of anything in or out of government would want to try to cut that much. On the other hand, the United States spends a lot more on defense than any other nation. Is it likely that we are secure spending 5 times more on defense than Chine, but suddenly not secure if we spend only 4.7 times as much as China?
It is also interesting to think of these cuts as they would apply to a household budget. The median household income in the United States is about $50,000. If a family making that much money had to cut 2% this year, they would have to spend about $1500 less over the year, or about $125 less per month. Any family would find this painful and sad. But what would we say about a family that insisted that such cutbacks would devastate the household’s ability to perform its functions? Would we not suspect that a serious part of their problem is not insufficient money, but excessive expectations and demands for consumption?
One last supposition. Suppose the family in question already had a debt bigger than their annual income, and that they routinely spent about 23% more per year than they earned, or accumulated about $11,000 in new debt each year — again, on an income of $50,000. Suppose further that they were asked to cut the $1500 per year as a first step towards getting their debt problem under control? And suppose they insisted that they just could not do it? Wouldn’t you wonder whether they were fundamentally unserious or in denial about their debt problem?