Sequestered Cuts are the Only Way

Rodney Johnson | Friday, February 22, 2013 >>


What’s the first thing you’d do if you found yourself entangled in a debt crisis? Credit cards maxed out… Zero cash left for the month once all the bills are paid…

Would you…

(a) Cut out as many unnecessary expenses as possible (like dinners out, $300 bottles of wine and the weekly poker night)…

(b) Borrow more money from any sucker who’ll lend it to you…

(c) Institute a tax on your neighbors, friends and family because they should always have paid you for looking out for them, supporting them and just generally being the best guy they know…

Or…

(d) All of the above?

The government’s tried (b). It’s tried (c).

Now it’s eyeing option (d). All of the above…

That’s right, I’m talking about the looming deadline for the sequestered budget cuts… the automatic percentage cut in U.S. discretionary spending across agencies of the U.S. government.

The law is awful because it doesn’t allow for a distinction between a good program and a bad one. They all get cut. There is a lot to be said for replacing “sequestered” cuts with “intelligent” cuts. But that wouldn’t work. We know this because Congress can’t cut anything!

A case in point is an 1872 (yes, over a century ago) law that allows minerals to be mined from public lands without paying a royalty. Gold or silver miners could extract gold, sell it, and keep all the money. Not only that, the U.S. government was on the hook to clean up the mines afterward.

All this was done in an effort to build out the frontier lands. It is safe to say, we no longer have that as a goal. However, we still have the General Mining Act…

Just the clean-up of mines has cost over $2 billion since 1998, and the tab is still growing. But don’t expect this act to be overturned anytime soon. There are Congressmen from mining states with very large constituents who need… need!… this law. It is what makes them profitable, albeit at the expense of taxpayers.

The point is that every department, every law, every program, has a group of backers that will be financially hurt by a cut to the budget for that law, program, or department. These people fight vigorously to stop any change. Who wouldn’t if their livelihood or wealth was threatened?

On the other side, the people who benefit from budget cuts – we, the taxpayers – don’t see any change in our paychecks or tax bills.

So our problem is that one group is hurt very deeply by job losses, business devastation, etc., while another group benefits very lightly. The scales are not balanced.

Given this situation, how can we possibly expect Congressmen to stand up to special interest groups on their own? Remember, these are the same special interest groups who fund campaigns and spend billions lobbying Congressmen every year.

The short answer is, we can’t.

The good news is that Congress recognizes its own lack of power and agreed to sequestered cuts, which President Obama recommended in 2011.

Now, neither the President nor Congress expected the sequestered cuts to be implemented. Everyone assumed that some deal would be reached in the 16 months between the agreement and implementation.

They were wrong, and here we are… days away from automatic cuts across the board.

I say, let’s go for it. If we can’t get 535 people who are PAID (and paid handsomely, I might add) to make tough decisions, we might as well force it on them.

It’ll be painful for everyone. No doubt. But afterward we can start making changes to laws, rules and programs that long ago lost their effectiveness.

If not, we can always push for another round of sequestered cuts.

Rodney

P.S. The cuts should create havoc in a number of areas (like air travel for example) because federal bureaucrats will be forced on furlough. This will slow any paperwork or program that involves federal processing (thinks visas, passports, etc.).

As for markets, expect rifle-shot reactions where certain companies (like defense contractors) take a hit. There will be a bigger affect in several months as the furlough of workers filters through the system and shows up as less income, less spending, and less tax revenue. That’s another reason to expect trouble later this year.

 

 

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Dow Heading for Historic Drop – Take Immediate Action

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Categories: Purchasing Power

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.