Pethokoukis, Economics, U.S. Economy

The sequester and Obama’s Faustian bargain

Photo Credit: The White House/Flickr

Photo Credit: The White House/Flickr

As the Obama White House keeps telling America, the sequester cuts to discretionary spending by the federal government will be devastating. Next time you hear Team Obama spin this line, remember the following facts:

1. In 2012, the Obama administration presented a budget with discretionary spending of $1.259 trillion in 2013 or 7.9% of GDP.

2. The current CBO budget forecast, which includes the across-the-board sequester cuts, pegs discretionary spending at 1.213 trillion, or 7.6% of GDP.

3. In 2009, the CBO analysis of Obama’s budget calculated 2013 spending at 1.269 trillion or 7.7% of GDP.

Now, officially, Obama wants the discretionary cuts to keep coming, though not as fast as Republicans. As far back as 2009, Obama’s budget saw discretionary spending way below pre-Great Recession levels of the Bush years. Economist Jeffrey Sachs ask the question in the FT, “Why would a progressive president plan for deep cuts in discretionary spending relative to GDP even as he advocates larger investments in health, education, infrastructure, clean energy, science and technology, job training, early childhood development and more?”

The answer: Obama made a bad bet:

Mr Obama ran for office in 2008 and 2012 promising to make permanent the Bush-era tax cuts for almost all Americans. These tax cuts were unaffordable from the start and were scheduled to expire in 2010. But to say so honestly, while the Republicans were promising to make them permanent for everybody, would probably have cost Mr Obama both elections.

So he made a Faustian bargain. He would champion the permanent extension of the tax cuts except for a tiny number of rich Americans, and he would silently plan for deep cuts in discretionary outlays as a share of GDP to compensate for the lack of adequate budget revenues in later years. In effect, he would allow rising outlays on mandatory programmes such as Medicaid and Social Security and debt servicing to crowd out public investments that are vital for America’s long-term economic future. And indeed, on January 1, Mr Obama and Congress agreed to make the Bush-era tax cuts permanent for 99 per cent of American households.

Mr Obama probably hoped that when the moment of truth arrived, when the spending cuts started to bite, the American people would support higher taxes rather than the spending cuts long called for in his own budget proposals. And perhaps they will still do so. Yet he has never presented an alternative with more robust tax revenues in order to fund a higher sustained level of public investments and services.

I would add that Obama probably never imagined he would lose control of the House, closing the window of opportunity for a more aggressive tax agenda. As I recently wrote in my National Review column: “It’s easy to forget that back in the heady New New Deal days of 2009, Democrats, such as House speaker Nancy Pelosi and former Clinton chief of staff John Podesta, openly spoke about the need for a value-added tax to pay for Obamacare. Former Clinton deputy treasury secretary Roger Altman helpfully suggested an opening bid of $400 billion a year.”

6 thoughts on “The sequester and Obama’s Faustian bargain

  1. So, what was actually spent on discretionary spending in 2012? That is what we should be comparing the CBO estimate of $1.259 trillion in 2013 spending. Is it more or less? Is there really any cut at all?

  2. “Mr Obama probably hoped that when the moment of truth arrived, when the spending cuts started to bite, the American people would support higher taxes rather than the spending cuts long called for in his own budget proposals. ”

    Yeah, I’m sure he thought the public would be grateful to fork over more dough so he could continue to “invest” it for us after we reaped the dividends of the stimulus, Solyndra, weatherization programs, Cash for Clunkers, Obamacare, etc.. It all worked out so nicely on the faculty lounge chalkboard.

  3. Why is defence discretionary and nondefence discretionary spending not separated as stand alone categories?

    It is baked in the cake that defence spending will decline, which does not necessarily mean that larger investments in health, education, infrastructure, clean energy, science and technology, job training, early childhood development and more will not take place.

  4. Study my Letter on [email protected]. (Search: Crazy Inbox)

    Gangs of Crooked, Thieving, Stupid, Lying, Con artists (like Barack Obama,etc.) AREN’T Countries, States, Counties, Districts, Cities, etc. Obama & his Gang are not only BANKRUPT, they’re Head- Over- Heels In Debt, & Operating Way In The Red, & They Have A Huge, & Increasing, Budget Deficit. There’s virtually zero $ for anything whatsoever.

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