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The Federal Budget: Sequester Déjà Vu

Mar 1, 2013 • Behavioral Economics, Economic Debates, Economic Growth, Economic History, Financial Markets, Macroeconomic Measurement, Thinking Economically, Uncategorized • 324 Views    No Comments

Today’s sequester is not the first.

Just like now, in 1985, cutting the deficit was popular…in theory. The question, though, was how to get legislators to do it. The answer was Gramm-Rudman (aka the Gramm-Rudman-Hollings Act or the Balanced Budget and Emergency Deficit Control Act of 1985). One of its authors, Warren Rudman, called the act, “a bad idea whose time has come.”

The goal of Gramm-Rudman was to intimidate lawmakers into acting by making the alternative much worse. Yes, it is all about BATNA, Best Alternative To a Negotiated Agreement. Targeting 1993 as the year that the budget had to be balanced, a rewritten Gramm Rudman listed annual automatic cuts that would kick in if the Congress did not pare spending down gradually.

Did it work? If we rewind to 1990, we could say, “Yes.” Most analysts say that the first President Bush and the Congress agreed on a 1990 deficit reduction package because of it. Basically, the 1990 deal said “paygo.” Any tax cuts or spending increases? They have to be paid for before they happen. Soon after, Alice Rivlin, President Clinton’s OMB head said, “it isn’t that no one ever thought of adding prescription drugs to Medicare. We just couldn’t find a way to pay for it. There was very real restraint.”

Paygo expired in 2002.

Now, do we have Gramm-Rudman Part 2?

And, just a bit more history:

1. A deficit summary:

Federal Deficits and Surpluses

2. The following CR, Continuing Resolution, from the Congress suspended the 1991 sequester:

NECESSITY TO SUSPEND SEQUESTRATION
Currently, the economy is weakening. The country is sustaining an economic shock made worse by oil price increases. The cost of Operation Desert Shield in Saudi Arabia is putting additional pressure on the deficit. The Congress and the Administration are working to address these problems, but the actions needed to work out this situation have not yet been implemented.

The Balanced Budget and Emergency Deficit Control Act recognizes that when the economy is weak, special circumstances regarding sequestration are required. Provisions included in that Act establish a procedure for the suspension of sequestration in these circumstances. Clearly, the economy has been weakening in the last several quarters. Examples indicative of this weakness are rising unemployment, fewer construction starts, a drop in retail sales, declines in industrial production, and increases in the consumer price index. Reports in the press indicate some regions of the country are already in recession.

The effect of the pending sequestration on domestic programs is massive. It would result in needless impact on a weak economy, if it were implemented, not to mention the impact on the Department of Defense during Operation Desert Shield.

Section 113 of the 1991 CR was what suspended the sequester:

SEC 113. (a) Any order on sequestration for fiscal year 1991 issued before, on, or after the date of enactment of this joint resolution pursuant to section 252 of the Balanced Budget and Emergency Deficit Control Act of 1985 is suspended and no action shall be taken to implement any such order.

Sources and Resources: Here, here and here are articles about Gramm Rudman and the Budget Control Act of 2011. For more on the current sequester, we presented a summary yesterday and here is my source for the Congressional suspension of the 1991 sequester. And for the federal debt, here is an excellent overview.

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