Understanding Fiscal Policy: Effects Of Sequestration

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Fiscal policy is the source of much controversy in the federal budget. Deciding how much to spend and where is a highly politicized decision that has very significant real world consequences. This sample economics paper from one of the world-class writers at Ultius explores the effects of sequestration in fiscal policy. 

Understanding Fiscal Policy: Effects Of Sequestration

Despite any broad assumptions that economics in United States budget politics is impossible to understand, whether Presidential or Congressional, there is a way to wrap one's head around a basic comprehension. The best way perhaps to get a foothold then, is to focus on the latest major fiscal policy action evolving from a 2013 action called Sequestration. What is the Sequestration? A Huffington Post article with a similar question in its title describes in simple English what this decision in American fiscal policy means. A law having been triggered by the Budget Control Act in 2011, and signed off by President Obama as a part of his budget proposals, stipulates a series of automatically rendered cuts in spending, equally subtracting money from both defense-related and domestic expenditures. 

The sequestration

While some critics deny that the Sequestration is a fiscal policy at all, but rather the avoidance of one, is a heated argument which seems to be mounting in the face of America's economic woes. Nevertheless, it is vitally important to get a grip on what types of spending cuts would be implemented, in what areas, and how the average citizen will bear the impact. It is critical to further understand that the length of time of the sequestration will be an entire decade unless Congress intervenes to instate a true fiscal policy plan. According to one source, the greatest percentage losses in federalized grants hit Wyoming, North Dakota, and Utah the hardest and it seems the harsh realities and fallout are already being felt by everyone.  It seems like the road to having arrived at this point has been long, hard, and definitely confusing. Each year there are projections or estimations on:

1. How much the Federal government budget should be spending
2. On what it should be spending

The fiscal projections are based upon annual accounts and also infiltrates:

• Politics
• Elections
• Congress 

In economic terms, people do not generally view the Federal government as having to deal with money, budgeting, and spending in the ways that individuals do. But politics and partisanship battles have overshadowed the fiscal policy realities that Congress, the President, and economic think tanks and advisers need to deal with on an ongoing basis. For example, the economic reality as pertains to fiscal policy in Public Administration of the federal government. Smith et al. hint that:

the federal deficit must be seen in the context of the overall size of the United States economy and that tables and figures can show the size of federal expenditures and revenues as percentages of the gross domestic product (GDP), an annual measure of all of the goods and services produced in the United States.  

As the years passed onward, a common observation points to an increase in military and defense spending alone. Common knowledge reveals that it is no secret there has been much debate concerning the wisdom, or wastefulness, in spending vast amounts on fighting recent wars in Iraq and Afghanistan. Yet the fact remains that a budget must be met and processed.

Main areas of spending of the fiscal policy

It is probably useful to categorize the main programs and areas of federal fiscal policy and budget allocation. Broadly speaking the categories roughly fall into the areas of:

• Social Security
• Medicare
• Medicaid
• Other Income Security
• Other Retirement
• Other Mandatory
• Defense
• International
• Other Domestic

These divisions are examples of the basic scenario. If you're wondering where or when the formal budget process that may have culminated in the Sequestration of March 2013 effectively, it pays to take a step back in history. 

Budget creation

Actually, the process for creating a budget arose in the 1970s.  At the time during the Vietnam War a Democratic Congress and Republican Presidential figure Richard Nixon were at a stalemate, and in sore disagreement regarding several political tensions. Naturally this intense headbutting involved the control of an economic nature. Their contrasting engagements over Congressional spending motivated Congress to move on its own behalf and establish the Congressional Budget and Impoundment Control Act of 1974; the two committees united both the House and Senate in writing decisions and economic legislature for packaged programs. Fast-forward to today and it seems plainly clear as though the American economy, at its core of federal governmental monetary resources, are losing strength rapidly. 

Cutting spending resulting from sequestration

Some programs cut by more than 20 percent include:

• The WIC Farmers' Market Nutrition Program
• The Juvenile Accountability Block Grant
• Public works through the Economic Development Administration

In an economic sense, it is only natural, and you may be wondering where does the money come from in the first place. According to figures and facts collected and documented by the National Priorities organization, the answer is somewhat straightforward. As you may have guessed or common sense would mandate that the Feds raise a tremendous amount of budgetary capital in terms of tax dollars revenue collection. Keep in mind there is a myriad of types of taxes, too. Some collected tax funds the general government administrative process, others government programs. An overview of fiscal policy budget year projections for 2014 may help to shed some light on the situation.

Current fiscal policy

The bulk is easily divided into:

1. Payroll Taxes
2. Individual Income Taxes
3. Duties
4. Excise
5. Corporate Income Taxes which makes up the smaller slice of the pie – not surprisingly

Nearly half of the projected Fiscal Yearly Budget for 2014 comprise Income Taxes. The National Priorities Project reports that an incredible:

100 million Americans households file a federal tax return each year, and those income taxes make up the federal government's single” largest source of income, reports.

Colleen Curtis in her article entitled “President Obama Sends Congress his Fiscal Year 2014 Budget,” comments that the Presidential assertions tell that the government views middle-class America as the wisest investment to drive the “true engine” of economic growth, asking Obama three questions:

1. How do we attract jobs to America?
2. How do we equip with skill level?
3. How to ensure that hard work equates to a decent living wage?

In the minds of many analysts and everyday Americans, the President may be asking the wrong questions. How can an economy be secure or even thriving when its production base is low, or not widely varied enough at all and especially to be able to compete with the globalized competition at hand?

No more middle class 

The basic reality is that there seems no longer to be a viable middle-class of which President Obama speaks. Without a middle-class, you only have rich and poor, polar opposites of a sad spectrum of the current economic situation for many in America. The closest many people feel they have come to the status of middle-class, is how their lives used to be – that is, they grew up middle-class but will never be able to afford a house that will realistically and eventually be paid for as their parents were able to achieve. Furthermore, the shocking circumstances in the United States reflect that it is commonly known more than 50 million people are solely, and totally dependent upon the government for food. This economic fact alone is quite stunning. You never would think that the richest nation in the world would have 50+ million of its citizens on welfare, and literally unable to feed themselves and their families.

Economic Realities 

Obama proposes to end tax breaks and advantages for companies who have outsourced jobs overseas. To reiterate one economic aspect of the plan, Obama proposes to somewhat instate punitive economic measures to companies and businesses that don't hire here “at home” in America. This does not seem practical at this juncture in time. It does not make good economic sense for a company's bottom line to choose to invest in hired labor costs unless it can truly afford to do so because of financial strength in other areas that outweigh the deficit. How many companies, particularly small businesses, can afford to do that? The reality in today's business environment is that most are seeking to cut labor where ever, and however they can. 

Infrastructure is key to fiscal policy

The next point on the Obama Administration list is to shore up the transportation and communications network because repairing the physical infrastructure of America will create jobs through various building projects. One would be inclined to ask exactly when the timetable might be on this section of the plan because Americans are hungry today. However, the idea is to start with the most dilapidated apparatus in bridges, roads and so forth to get the ball rolling. Also, President Obama interjects that a 10 percent tax credit shall be given to “hire new workers or increase wages,” according to the Curtis article, which does make a good economic reparation decision.  The only possible problem with this is that it doesn't take into account helping displaced workers who have lost their jobs. Hiring new workers sounds wonderful at face value, yet what about the workers who have been unemployed for a year or more and who are trained professionals in their craft such as in areas of construction.

Fiscal policy breakdowns 

Authors of The American Congress remind readers:

“The president is a central player in congressional politics. When the president proposes a change in direction in budget policy, it usually changes Congress's agenda.”  

The combination of the sequestration being in effect and recent actions with the Presidential intent of Fiscal Policy for 2014, the other shoe – so to speak – is left to drop by the economic legislative decisions of Congress. Critics abound with a myriad of criticisms regarding the Sequestration itself, in terms of bad policy. Five reasons why the $1 trillion in sequestration cuts are terrible include:

• It is alarming because it was never actually intended to take place
• It will hurt the economy
• Sequestration cuts severely impact essential programs
• Arbitrary cuts and price controls are destructive and unfair, harming disaster relief funds, Head Start, law enforcement, and air traffic control
• The federal government needs to offset state and local government financial contraction   

Cautioning against sequestration

William Depperman cautions readers not to be fooled by the words of the President. He insists that the claim of economic lack or inadequacy is a farce, and calls the sequester a codeword for a quick fix as a “refusal to fund social programs,” and more.  Depperman claims that the sequestration is only the beginning and serves:

"to make Medicare and Social Security its primary domestic target of the capitalist dictatorship of millionaires and billionaires.”

A rant to be sure, yet Depperman does not by any means hold to a socialist remedy but is criticizing “cuts” rather than “savings” and furthermore croaks that the Feds are:

"cutting military spending simply because they cannot launch any more full-scale invasions of other countries at the present time.”  

As you can easily discern, whether current or historically based, actions are very complex at the level of national fiscal policy determinations. 

Conclusion

All in all, the fact remains that even in the arena of the discipline of economics, statistical, numerical, and scientifically-driven academic evaluations do not always add up. Fiscal policy always involves political will at the government level and can be Machiavellian in nature. The national fiscal policy is more complex than its smaller sister entities of state and local governments. The severity of the budget crunch and sequestration cuts demands the attention of what the best in economists' advice can muster. Some doomsayers think it's already too late to remedy, with even the Average Joe who understands little about economics believing the American capital economy is poised for a serious crash. Economics may be the answer, given that swift actions to mitigate the situations are on the horizon. Meanwhile, the masses will have to sweat it out while the elites will do what they do.

Works Cited

Curtis, Colleen. “President Obama Sends Congress his Fiscal Year 2014 Budget.” Whitehouse. WhiteHouse.gov, 10 Apr. 2013. Web. 28 June 2013.

Smith, Steven S., Jason M. Roberts, and Ryan J. Wielen. The American Congress. 6th ed. Cambridge: Cambridge University Press, 2009. Print.

William H. Depperman. “Five Reasons Why the Sequester's Automatic Spending Cuts are Bad Policy.” Tax Policy Center. Urban Institute And Brookings Institution. Web. 28 June 2013. 

“What's New – Sequestration's Havoc Hits Home.” National Priorities Project. NationalPriorities.org National Priorities Project, 2013. Web. 28 June 2013.