Sequestration and Potential

Introduction

On August 2, 2011, President Barack Obama signed into law the Budget Control Act of 2011. This act was formulated off the guidance of the 1985 Balanced Budget and Emergency Deficit Control Act which introduced the term heard on many news stations today, sequestration. The Budget Control Act of 2011 was the final resolution to the debt ceiling crisis that capped in 2011. The basis behind the 2011 Act is to increase the statutory debt limit and work towards successful budget cuts which will lower the nation's debt. Sequestration cuts will affect many vital federal programs, and the repercussions of the Budget Control Act can be detrimental to our economic future.

The 1985 Balanced Budget and Emergency Deficit Control Act

In December 1985, President Regan signed into law the Balanced Budget and Emergency Deficit Control Act amendment, which is also known as the Gramm-Rudman-Hollings. This amendment allowed the debt ceiling to be raised over $2 billion. In addition to raising the debt ceiling, it also called for a "five-year deficit reduction plan," (Bancroft-Berkeley) which would provide a balanced budget by 1991. The term sequestration was used to describe the mandatory spending cuts the Act required. In the 1985 Act required that fifty percent of the cuts would be from discretionary spending, and fifty percent would come from defense. Programs like Social Security, Medicare and other social/anti poverty programs were exempt from the mandatory cuts. In Bowsher v. Synar (1986) the Supreme Court ruled this Act unconstitutional saying the "sequestration process gave Congress undue budgetary power." (Bancroft-Berkeley) The act was passed again in 1987 and the budget was set to be balanced by 1993 with new deficit numbers. This act provided the baseline for budget sequestration signed into law with the 2011 Budget Control Act.

Sequestration and Keynesian Theorists

The 2011 Budget Control Act is a government policy to stop the expanding deficit and increase the debt ceiling. The definition of sequestration according to the Free Dictionary is "the seizure of property, or a writ authorizing the seizure of property." Congress is applying this term to "make the size of the Federal government's budget deficit a matter of conscious choice rather than simply the arithmetical outcome of a decentralized appropriations process in which no one ever looked at the cumulative results until it was too late to change them." (Johnson, auburn.edu) The act of sequestration is meant to cut the deficit, but in doing so will cut many government funded programs, that could result in higher unemployment rates or increased inflation, which is against the classic Keynesian school of economic thought. During times of recession, the Keynesian theorist's argue that government should increase spending to avoid climbing unemployment rates. According to economist Mark Zandi and Alan Blinder, the stimulus spending of 2009 through such programs known as TARP "likely warded off an outright depression. Without those programs the gross domestic product would be 6.5 percent lower, eight million more people would be unemployed, and prices would be falling as deflation set in." (Brown, 2010) These statements describe how the Keynes theory of government spending to increase productivity works, where a sequestration to cut spending could be detrimental to the economy.

Any increase in spending by the government via transfer programs, military spending, etc. would cause a right shift in the IS curve, which would increase output and the overall raise the level of GDP. If the government cuts programs and decreases spending with sequestration, the IS curve will shift to the left and could prolong the economic recession caused by the world financial crisis. History shows that there are peaks and valleys in the actual and natural GDP that are corrected using stabilization policies that are either monetary or fiscally based controlled by the Fed or congress. The goals for any stabilization policies is to promote growth as fast as possible, which if congress mandates sequestration cuts, the productivity growth rate could fall, causing the GDP level to shrink.

Long Run Economic Stability

The 2011 Budget control Act established the sequestration spending cuts across the federal budget to be of at least $1.2 trillion over the next ten years. In Defense spending, there is a proposed cut of over $500 billion dollars; the rest of the cuts are out of discretionary spending, one area being Research and Development programs, which could have the largest impact on long run economic stability. According to the Information Technology and Innovation Foundation, the "sequestration's effect on federal R&D will reduce GDP by hundreds of billions." (ITIF.org) 60% of basic Research and Development programs are funded through federal sources, if congress follows through with the $95 billion in cuts to R&D it is estimated that at drop of $203 billion will occur in the level of GDP.

According to Chairman of the Federal Reserve, Ben Bernanke said "the economic recovering is being held back by the ongoing fiscal uncertainty, and that the country faces a shallow recession that could cost over one million jobs