May 23, 2013
Life after sequestration
After sequestration came into effect on March 1, politicians in Washington can now begin serious negotiations about cutting spending and increasing revenues. Because the effects on the economy will not be felt immediately and since President Barack Obama risks less than Republicans, there is some room for negotiations that can lessen the pain of spending cuts and increase some revenues to establish a credible road map toward a balanced budget.
After unsuccessfully trying to corner Republicans to delay sequestration, President Obama announced that his government had begun the process to trim US$85 billion of spending in 2013. Obama said that the effects would be real, but not immediately felt across the economy. Though he would have preferred a different outcome, Obama was confident in knowing that most US citizens will blame Republicans for any negative effects of sequestration. Polls also indicate that if the spending cuts end up having a positive effect on the economy, both the White House and the Republican-controlled House of Representatives will benefit.
Part of the problem—and what ended up convincing both parties that sequestration was not a bad alternative — is that it is not altogether clear what the effects of sequestration will be. Spending cuts will have a short-term negative effect on the economy, but depending on when and how the cuts are made, the damage can be softened. Moreover, if Congress acts to give the different federal departments and entities more freedom to reassign spending, the effects on employment and government contracts can be minimized, and better budget efficiency can also be achieved. Furthermore, there will now be more room for Congress to increase spending on some popular social programmes and Republicans and Democrats can agree on new revenues through the elimination of tax breaks and loopholes. After the hurdle of sequestration was not avoided, spending-cut zealots and social-programme advocates can find room to compromise on deals that will shrink the deficit and save key social programmes.
The decision to let sequestration begin has also taken pressure away from the negotiations to raise the debt ceiling. Republicans made opposing tax increases their main priority in budget negotiations. Because there is still a budget deficit that needs to be dealt with and sequestration has put in place tough spending cuts, Republicans have little room to manoeuvre. As spending cuts will delay the deadline to raise the debt ceiling and as Republicans no longer have a bargaining-chip to pressure Obama with, the pressure to balance the budget will now be on the revenue side. President Obama will argue that after he moved forward with the spending cuts required by sequestration, Congress must act on eliminating loopholes and reducing tax breaks. It will be tough for Republicans to articulate a credible position if they only focus on additional spending cuts and no tax increases.
President Obama now has a clear field to push his agenda for the second term. Awaiting summer, he will wait for Congress members to cave in to pressure from their own constituencies to soften the pain of the sequestration by providing additional spending for popular programmes. Obama will ask that any new spending programmes be fully financed by additional revenue increases. Obama will take the higher moral ground of fiscal responsibility as Congress struggles with pressure for additional spending from its constituencies. The end result will be positive for the US economy in that the fiscal deficit will shrink and the country’s long-term fiscal position will improve.
With the fiscal crisis emergency receding, Obama will push Congress to legislate on immigration reform and he will also focus on the implementation of Obamacare. In addition, the Supreme Court ruling on gay marriage, expected in the summer, will create an additional opportunity for the president to build a legacy of greater social inclusion and higher tolerance. Obama will continue to push for job-creating initiatives and for investments in education, especially for pre-school children. On foreign affairs, Obama will have less room to manoeuvre, but the successful Senate confirmation of Chuck Hagel in Defence and John Kerry in the State Department have also shown that Obama is beginning his second term on a much stronger footing.
The enthusiasm in Obama’s camp is evident. Democrats have announced that they will launch an effort to turn Texas from a solid red state into a competitive state in 2016. Some close to the president are weighing the idea that Michelle Obama could run for the Senate in 2016 when the seat that Barack Obama held will be up for re-election. Currently held by a Republican, that seat could now become the next political objective of the presidential family. Even though the pain will be real, President Obama has more to gain than to lose after the White House and Congress failed to reach an agreement that could delay the drastic spending cuts required by sequestration. There is life after sequestration and it might just turn out better for President Obama than for Republicans.