The Sequester if Falling, The Sequester is Falling

I cannot believe the sky-is-falling panic around the sequester.  It is all so much BS.  The sequester represents a trivial percentage reduction in spending down to levels we have not seen for, like, 2 years or so.  But apparently everyone is getting into the act claiming the world will end if we cut a couple of percent from the growth rate of government spending.  As an illustration, this is the over-wrought absurd email I just recieved:

If implemented, the US Navy directed cancellation of ship repair and maintenance due to lack of an approved Defense budget and sequestration will have a drastic impact on the commercial ship repair industry across the nation.   The more than 150,000 expert ship repair professionals that have been cultivated across the nation cannot be easily replaced by a new workforce.    In addition, many of our yards nationwide do both defense and commercial work.  The Navy cancellations would severely undermine their ability to continue operating in a high quality, efficient  manner.

The Virginia Ship Repair Association urges you to learn more and voice your concern. We have provided templates for mailing  letters to your members of Congress, as well as contact lists to make phone calls. Please join us in this effort to preserve our maritime interests, protect our shipyards and secure the future of our workforce.

US Shipyards among the great pork-barrel spending stories in this country's history.  Show me a shipyard with lots of defense business (e.g. Ingalls in Pascagoula) and I will show you a Senator from that state who wielded immense power on Congressional defense committees.

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  • bigmaq1980

    The way I see it, we are in a "pay me now or pay me later (with interest)" situation.

    Of course, any cut, however small, will cause howls from everyone affected - this is the natural process of special interest / crony politics.

    Our government is spending $1T+ per year more than it is taking in. We are nearly at the point where we cannot raise the taxes enough on EVERYONE to sustain that level of spending. A real risk is that should interest rates increase by modest amounts we will quickly reach the event horizon.

    If we don't take the "medicine" now, we will undoubtedly have a catastrophe later that will be impossible to avoid.

  • http://profiles.google.com/maruadventurer john mcginnis

    Irony is the Navy is preparing to cut up a reasonably new minesweeper having run up on a reef for ecological reasons! Talk about wrong priorities.

  • http://www.facebook.com/matthew.slyfield Matthew Slyfield

    TinyURLs are annoying crap. It is unsafe these days to follow links when you don't know up front exactly where they go.

  • a_random_guy

    It's just spam anyway, put in by a human rather than a machine.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Here is what government spending looks like:

    http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/01/Spending%20Q1%20TBAC.jpg

    Defense expenditures are significant, but are now dwarfed (more than twice) by welfare spending, HHS & Socialist Insecurity (which is insolvent).

    Trimming defense spending will have miniscule effect. The source of the problem is now welfare spending, and it will get much, much worse.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    The excrement is now hitting the rotating blades.

    “Then” is now “right now.”

    Either you understand this, or you don’t.

    Those of you who don’t (LarryG, et al.), get ready to go to hell in a flaming Studebaker, with Boeing 787 LiON effects.

  • http://www.facebook.com/matthew.slyfield Matthew Slyfield

    The graph seems to be missing something. Namely interest payments on the long term national debt. This one item by itself is a significant chunk of the annual budget (If congress ever gets around to enacting one).

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Those are included in "Treasury" outlays, column 4.

    The source of the graph is TBAC, the Treasury Borrowing Advisory Committee

    http://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Pages/members-index.aspx

  • bigmaq1980

    However, that is based on current estimates of future interest outlays. As they roll over the bonds that expire, I would suggest that, long term the interest rate is bound to increase dramatically given the vast levels of monetization of current and foreseeable $1T+ annual deficits.

    You mention entitlement spending, but the ZH article looks at 2013 only - the PV of those liabilities alone dwarf the current debt level plus $1T+ deficits for the next several years...estimates vary from $65T to >$200T - for comparison: our debt is at $16T and our GDP is at $16T.

    I also don't think public employee pension benefits are factored in. IIRC, they are under funded right now, AND much of their trust fund is invested in government issued securities (i.e. like the SocSec "trust fund", the government owes itself).

  • bigmaq1980

    Right. We are approaching the "event horizon" on being able to escape the eventual economic realities we are hurling towards.

    If we are lucky, and we continue down this path, it might only be as bad as Argentina...Germany in the 1930s would be one example of some of the worst side of the outcomes we face.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Exactly, this is a current snapshot only, and entitlements will continue to explode. There is no way to avoid this.

    But the important detail is that welfare outlays are now already more than twice defense outlays, so cutting one and not the other will have zero effect.

    The tax burden required for any meaningful sustainability for social welfare programs is crushing, upwards of 25% GDP. Historically, taxation hovers around 18% GDP and when you get north of 22%, the economy implodes.

    No economy can sustain 25+% GDP taxation. We are now locked in to zero growth. It's over.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Event Horizon Economics

    http://www.zerohedge.com/news/2013-02-09/guest-post-us-economy-now-dangerously-detached-reality

    Japan is our best possible outcome, Greece/Spain/Italy and Weimar Germany the worst.

    Our population is not as docile as Japan’s.

  • bigmaq1980

    Great comments mesaeconguy!

    Keep in mind that Japan is not "done" yet, they are merely ahead of us on the debt to gdp curve.

    We have extremes in this country that are not the typical left, right variety. I worry that we could be herded by some populist into a either a Nationalist Socialist camp or into a Soviet/Maoist camp. A certain red flag would be any move to a "third term" in 2016.

    Too many people who understand the potential for economic calamity vastly underestimate the possibility of political turmoil, thinking they can "ride it out" or worse, say "bring it on", figuring they have enough supplies and ammunition to keep them "protected" and whole. They may be able to ride out any transitional turmoil, but they will be crushed none-the-less if the ensuing result is the worst case scenario.

    I think things have a way to go before they are "completely lost", but we are much closer than ever I imagined we could have been in our life times.

    If ever there was a time to engage and convince those who can be to swing things back to where they ought to be, now is it. It is doable - Obama only won by <300K votes in the swing states.

  • Matthew Sullivan

    http://www.ritholtz.com/blog/2013/01/short-history-of-the-debt-ceilinggovernment-shutdowns/

    I thought the above analysis was a useful way to think about it.

    "When the government is forced to shut down, the President has wide latitude in how this occurs. So, the President can dictate how this will happen and presumably will do it in a way that helps him politically."

    ....

    "Now President Obama wants the government to be viewed as the single most important driving force in the world economy. So, a shutdown brings talk of default, depression and crashing markets. This fear of armageddon is the leverage he hopes to use over the House Republicans. And to be fair, he needs this kind of leverage."

  • nehemiah

    How do local bureaucrats react when cuts are demanded by the "folks"? Okay, that means we need to cut the police, firemen and EMT's. Also no gas for the ambulances. You want cuts, well you're going to get them.

    At the Federal level we get the above type of stuff along with cutting medical benefits for wounded veterans, cutting defense capabilities, diminished security for the homeland or at our embassies. Oh wait a minute, that already happened, but not because of budget cuts. Benghazi was incompetence.