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Sequestration is Washington’s latest economy-hobbling act

Posted March 01, 2013, at 4:31 p.m.

In isolation, sequestration might not be terribly damaging, given that the $85 billion in spending cuts are expected to reduce U.S. gross domestic product by 0.6 percentage point in 2013.

Yet this observation is misleading: The actual economic damage is compounded by the other deficit-reduction measures that have already slowed growth, including a 2 percent payroll tax increase. All told, economists expect the sequestration plus last month’s fiscal-cliff deal to slow the pace of GDP growth by 1.5 percentage points. That’s no small change for an economy growing about 2 percent a year, particularly one that appears to have lost steam in the fourth quarter of 2012.

The wreckage could be even greater if Congress fails to extend the government’s temporary spending authority, which expires March 27. Without a budget or an extension of current spending levels, some federal operations will need to shut down, a situation that will take its own toll. And let’s not even begin to contemplate what might happen come August, when the U.S. again hits its debt ceiling.

Consumers, who last month began paying an extra $15 a week on average in payroll taxes, are already feeling the pain. Wal-Mart Stores, Burger King Worldwide, Darden Restaurants and Kraft Foods Group have lowered earnings forecasts because of sluggish sales. The National Retail Federation says it expects almost 50 percent of consumers to curtail spending because they have less take-home pay. The gloomy spending mood is perhaps best summed up in internal Wal-Mart emails obtained by Bloomberg News: “Where are all the customers? And where’s their money?”

Yet rather than replacing the indiscriminate cuts that kick in March 1, the two parties are busy fighting over who came up with the idea and which party should take the blame. The reality is that they are equally at fault: Both sides accepted the across-the-board cuts if they couldn’t agree to more sensible ones. Instead of talking, both parties have decamped to their ideological corners, refusing to even look for areas of compromise.

The White House, which had gone on the offensive by outlining the damaging repercussions from sequestration, is blaming Republicans for caring more about the wealthy than education, national security and food safety. Yet rather than view the seriousness of the cuts as a reason to focus on the U.S.’s real problems, including unsustainable entitlement spending, Democrats offered up a millionaire’s tax and other long-rejected ideas.

Republicans, it should be noted, are no better: Their approach is to gut government programs, particularly those aimed at alleviating poverty and the recession’s aftereffects, to offset $55 billion in defense cuts.

The intractability might be understandable if there truly were no path to an agreement. But there is a path, a pretty clear one, in fact.

Democrats could agree to entitlement changes that curb the rate of spending without chopping benefits, including raising Medicare premiums for high earners, reducing payments to drug companies and adopting a more accurate measure of government inflation.

Republicans could agree to limit tax expenditures, particularly for wealthier earners, something the party’s leaders have shown a willingness to consider. A new proposal by deficit hawks Alan Simpson and Erskine Bowles splits the difference, offering $600 billion in health-care savings and $600 billion in new revenue to offset the entire $1.2 trillion sequestration.

The path is there. When they meet at the White House at the end of the week, President Barack Obama and the congressional leadership could choose to walk down it — if they truly want to, that is.

Bloomberg News (Feb. 28)

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