The Sequester – What is it?
Here we go again. First we had the Fiscal Cliff drama to contend with, then Congress entertained us throughout the holiday season with their Debt Ceiling antics. As if that were not enough, now we get to watch as Congress and the White House do their silly little political dance over the latest national fiscal crisis, the Sequestration.
The Sequester – What is It??
If you recall from my article a few months ago on the resolution of the Debt Ceiling crisis, part of the resolution that was agreed upon back during the 2011 Debt Ceiling argument was a provision in the Budget Control Act of 2011. This provision essentially mandated over $1 trillion in federal spending cuts over 10 years, with half coming from the military defense budget, and the other half coming from domestic discretionary spending.
For 2013, this will mean roughly $85 billion in across-the-board spending cuts. These automatic cuts are scheduled to go in effect on March 1, 2013. Along with military defense, the remaining cuts will impact programs all across the nation, from energy, housing, and law enforcement, to education and public safety. Currently, entitlement programs such as Medicare, Medicaid, and Social Security are not affected.
Don’t We Want Federal Spending Cuts?
Well, yes and no. Conventional economic wisdom says that it is always best to implement spending cuts when the economy is robust and growing. That way, there is a much milder impact on overall economic growth. But as we have experienced the past five years, the economy is in an extremely fragile state, and many believe that $85 billion in current-year spending cuts will be the proverbial straw that breaks the camel’s back. The 4th quarter of 2012 saw the slowest growth (virtually flat growth) since the recession ended in 2009. The most serious concern is that the Sequestration will throw the economy back into recession.
While we have emerged from recession since 2008, the recovery has been the weakest recovery from recession in history. With still historically high unemployment, a fragile housing market, all-time low interest rates, a European union on the verge of economic collapse, and tax increases on virtually all Americans, now does not seem like the appropriate time to slash yet more economic activity. Keep in mind, while federal spending can be looked at suspiciously, a dollar spent on wages for a federal worker are no different than wages spent in the private sector. Both produce equal value in terms of economic activity.
So What Does This Mean?
Fortunately (and I use that term quite loosely), we have the hindsight having already been through Debt Ceiling I, Debt Ceiling II, and the Fiscal Cliff all in the past few years. So we know a little bit about how this story might play out. Already we are seeing increased volatility in the stock market as nervous investors begin to re-think their investment decisions. I don’t anticipate that ending soon.
My hope is that Congress and the White House come to an 11th hour resolution before the President is required to mandate the cuts as prescribed in the Sequestration bill. As we are quickly approaching the deadline, there is a good chance that a deal will not be struck before the deadline, and we will begin hearing about the spending cuts such as work furloughs and program cuts immediately. Any agreement that is made could suspend those spending cuts going forward.
Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.
I say we call his bluff and let it all hit him in the face. If this Armageddon he is forecasting was to happen, the fact that he would allow criminals released, the safety of airline passengers be jeopardized and all the other ten plagues that are supposed to happen, which HIS White House proposed and signed, proves that his ego and hatred for anyone who opposes him is much more important that the people who he is suppose to "Lead" !!
You are probably correct that there is a lot of excess spending existing within the Federal budget. I'm not really arguing that point. The point that I was trying to make in my commentary is that regardless of the source of spending (discretionary, military, private sector, etc.), any reduction in economic activity will have a negative impact on the economy. While $85 billion is a small percentage of overall Federal spending, it can have a material impact on GDP. Considering that GDP last quarter clocked in at roughly *zero* growth, all reduction in GDP can have not only a material impact, but also a psychological one (especially if it is enough to tip us back into recession) - and this is what can push the stock market back into a correction, or worse. The bottom line is that typically a challenging economic environment, as we are in the midst of right now, is not the ideal time to consider reducing spending. As popular as it might be to blame Washington for our troubles (and trust me, I put much of the blame squarely on them), forcing arbitrary spending cuts right now is not going to do anything to help the problem get better.
Any business that is in the red as this country is, will not survive by increasing their spending and not cut the waste out of their budget. Even more critical is try to run a business with no budget for 4 years. Name one company that has been successful doing that. This country has an obscene amount of waste. If the president and his hack team had focused more on this waste and not play political games, these cuts would have even a less impact and nowhere near the one like he tried to convince us it would have. To have to accept that this is the way Washington works today is not acceptable. Don't want to cut? Instead of spending millions on projects like robotic squirrels, move it to legitimate expenses that promote growth. Tell me how robotic squirrels stimulate growth? And stop growing the government! No one in Washington wants to get off the golf course and take the time to scrub the budget. Unfortunately, we have a President who was smart enough to know if he gives it away, they will vote. At this point I am thrilled that nothing was 'Resolved" on the sequester. It calls his bluff and as he has already started to back track some, and it brings to light even more his lack of leadership. I woke up this morning and there were no locusts, frogs or fire and brimstone falling from the sky. Sun is shining, and planes aren't crashing in midair. A good history lesson would be good for all in Washington. We are on the same path of collapse of many who preceded us.