The Sequester Game

A few thoughts about the sequester and the political battle surrounding it.

First, recall how it came about. When Democrats and Republicans in Congress couldn't agree on how to cut the budget deficit -- budget cuts or tax increases, and who bears the burden -- they decided to connect a "ticking clock" to a "bomb" of budget cuts that both sides would find loathsome. The cuts would hack away at favorite programs of both sides and be so terrible that the two sides would certainly come to an agreement rather than let the bomb go off.

But suppose one side believes the cuts they object to, the cuts to defense for example, will be easy to reinstate down the road by whipping up public pressure, while the other side's programs will be much harder to bring back. Then the right strategy is to let the cuts happen, then do your best to get your programs reinstated while at the same time blocking the other side (and there's probably some bias on both sides about how much the public values the programs they support, and this bias makes it more likely that the thinking above will take hold -- let the cuts happen, the public will support my side, the programs my side likes will return, and the other side's programs will be gone).

The reinstatement of programs (or tax increases) will surely involve compromise to some extent, agreeing to support programs or taxes the other side likes in return for their support of your programs. But given the lack of compromise to date I have to laugh at myself for saying that, and it's more the game will be to try to force reinstatement without any compromise by creating public backlashes against cuts (to say defense). In fact, we've seen some of this already.

The sequester was supposed to make it too costly for the two political parties to fail to come to an agreement. Each side would put up programs it really likes and the threat of losing them would motivate compromise. But the programs one side really likes are also generally the programs the other side really hates, and so long as it is believed that your programs have broad public support and are likely to be reinstated, the best strategy is to do exactly what was done, let the cuts happen and then have the political fight over what to bring back.

Republicans don't believe that, in the long-run, support for defense will be eroded. Future budgets (and fear-mongering) will take care of that. They do believe they can block tax increases, mostly anyway, and block lots of programs Democrats support from returning.

And they may be correct. Obama's attempt to generate public support by warning about all the bad things that will happen fell flat, so far anyway (it could change as the impact begins to be felt), and I think that Republicans are winning this battle. Unfortunately, that victory comes at a cost, the recovery of output and employment will be slower because of this ideological battle over the size and role of government. But that's a price Republicans are willing to pay in order to deliver this ideological victory to key constituents (most of whom are employed and doing quite well).