Magazine | March 23, 2015, Issue

Save the Sequester

It’s the most successful program of spending cuts in modern times

The most unheralded achievement of the Republican Congress over the last four years has undoubtedly been the Budget Control Act of 2011 (BCA), which has shrunk the size of government more effectively than any budget tool in a generation. A sign of how well the budget caps and across-the-board spending cuts called “sequester” have worked is how much President Obama and left-wing special-interest groups have come to despise what the president calls this “mindless” spending-reduction formula.

But for a growing number of congressional Republicans — especially the appropriators — this success has become too much of a good thing, and they are looking to undo some of the sequester-imposed cuts. President Obama is enticing members concerned about national security by offering to devote half of the extra spending to beefing up the defense budget. If Republicans get suckered into this fiscal jailbreak, it will effectively kill the sequester for good and give a green light to the Obama budget blowout, which would add nearly half a trillion dollars of spending over just three years. All the hard-fought fiscal gains would be lost. Fiscal conservatives would be smarter to force Obama to comply with the sequester and overall caps while shifting spending within the caps from domestic to defense programs.

Let’s start with the salutary impact that the sequester and caps have had by slamming the brakes on the Bush-Obama full-throttle spending from 2008 to 2011. The sequester came about as a by-product of the famous 2011 “debt ceiling” negotiations between Obama and Republican House speaker John Boehner. Before those negotiations, the federal government was spending 24.4 percent of GDP. In 2014, expenditures fell to 20.3 percent.

This 4.1-percentage-point reduction in federal spending as a share of national output is the equivalent of an annual $714 billion in resources that the government would have spent and squandered. This constitutes one of the largest fiscal retrenchments in modern times. And all of this is happening while the White House is occupied by the most liberal president since LBJ.

To understand how this fiscal miracle happened, we have to revisit the final days of the 2011 debt-limit showdown between Obama and Boehner. Boehner and then–House majority leader Eric Cantor shrewdly agreed to the cap-and-sequester mechanism proposed by Jack Lew, the lead budget negotiator for the White House — with half the cuts to come from defense and half from domestic discretionary programs. Lew thought he had set a trap, because Republicans would never go along with these tight military-spending restraints.

But Boehner played Lew like a fiddle. He rejected a phony entitlement-reform-for-tax-hike deal — an outcome that much of Washington was cheerleading for, but that would have caused a civil war within the GOP — and instead wisely embraced the binding spending controls and the automatic sequester cuts. It was his finest hour. Liberals never knew what was about to hit them.

Under the BCA, total federal outlays have fallen from $3.603 trillion in 2011 to $3.506 trillion in 2014, in nominal dollars. This is the first three-year stretch of declining federal outlays since Dwight Eisenhower’s first term in office (though in 2015 federal outlays have started to rise again). Not all of this reduction is due to the BCA sequester. A fall in interest rates has reduced federal borrowing costs, and the repayment of funds to Fannie Mae and Freddie Mac and the reduction in welfare payments caused by the end of the recession have played a role as well. But the sequester’s spending guardrail is also a reason the deficit has fallen by two-thirds from its towering height of $1.4 trillion. Call it the tea-party movement’s revenge.

To fully appreciate this turnaround in budget policy, consider the breadth of the Washington spending frenzy in recent years. Federal expenditures from 2007 to 2011 skyrocketed by $874 billion in nominal dollars — a nearly one-third blowout during an era of modest inflation. Now, thanks to the caps and sequester, discretionary programs, after peaking in 2011 at $1.347 trillion, have been sliced and diced to $1.179 trillion — a near 13 percent three-year actual cut in agency spending (16 percent in inflation-adjusted dollars). A little more than 60 percent of these cuts has come from the defense budget, and the remaining portion from domestic programs — everything from transit grants to foreign aid to the IRS to Head Start to bridges to nowhere.

Actual discretionary spending (in nominal dollars) from 2011 to 2014 was $427 billion lower than that projected by the Congressional Budget Office in January 2011, prior to the caps’ implementation. Not bad.

Republicans rightly warn that the severity of the military cuts hurts national security. But many of these cuts would have happened anyway as a result of the wind-down of military operations in Iraq and Afghanistan. At least Republicans were able to secure domestic cuts at the same time. There has been no replay of the post-Vietnam domestic-spending boom that liberals scored from 1968 to 1978, when military spending as a percentage of GDP shrank by half while entitlements grew by nearly 50 percent. To maximize national security and money for troops, spending on non-defense items in the Pentagon, including billions of dollars of green-energy programs, should be eliminated, but the Obama administration and Republican appropriators have rejected this option.

One complaint is that entitlements are still inflicting relentless fiscal destruction. The budgets for the big three programs — Medicare, Medicaid, and Social Security — plus a new fourth one, Obamacare subsidies, are expected to nearly double (86 percent growth) between 2014 and 2025. These fiscal Goliaths are only minimally constrained by the BCA, because the White House has steadfastly resisted any reductions to their growth rate. Alas, the prospects of badly needed market-based entitlement restructuring, such as personal accounts for Social Security, are close to zero under this president.

Some argue that spending cuts are “austerity” and that the sequester has hurt the economy. Wrong. The economy and jobs have picked up steam as the government has shrunk. Though it’s still a flimsy recovery, economic growth and government spending have been shown to move in opposite directions in recent years, refuting the Keynesian gospel of the Left. This has been the pattern for the last 50 years at least. Milton Friedman had it exactly right: Less government spending means more private-sector growth; there is no magical “multiplier effect” of government spending.

All of this is to say that right now Republicans hold all the cards on the budget. If they can force President Obama to live within the overall spending caps that he has twice agreed to and that are cemented into law, then with a pickup in economic growth, federal spending could fall below 20 percent of GDP by the last year of the most statist president in modern times. There is no executive order the president could issue to stop it. Only Republicans can bail out the big spenders.

That is why liberals — who had hoped the reelection of Barack Obama would bring on a second Great Society spending binge — have learned to hate the term “sequester.” And it is why conservatives should keep loving it.

Mr. Moore is a contributor to National Review Online and Fox News.

Stephen Moore is an economic consultant with Freedom Works and served as a senior economic adviser to the Trump campaign. His new book with Arthur Laffer is Trumponomics: Inside the America First Strategy to Revive the Economy.

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