Why Obama Refuses to Kill the Sequester

By William K. Black
(Cross posted at Benzinga.com)

We are in the midst of the blame game about the “Sequester.”  I wrote last year about the fact that President Obama had twice blocked Republican efforts to remove the Sequester.  President Obama went so far as to issue a veto threat to block the second effort.  I found contemporaneous reportage on the President’s efforts to preserve the Sequester – and the articles were not critical of those efforts.  I found no contemporaneous rebuttal by the administration of these reports.

In fairness, the Republicans did “start it” by threatening to cause the U.S. to default on its debts in 2011.  Their actions were grotesquely irresponsible and anti-American.  It is also true that the Republicans often supported the Sequester.

The point I was making was not who should be blamed for the insanity of the Sequester.  The answer was always both political parties.  I raised the President’s efforts to save the Sequester because they revealed his real preferences.  Those of us who teach economics explain to our students that what people say about their preferences is not as reliable as how they act.  Their actions reveal their true preferences.  President Obama has always known that the Sequester is terrible public policy.  He has blasted it as a “manufactured crisis.”

the administration has stated publicly the three reasons this is so.  First, the Sequester represents self-destructive austerity.  Indeed, it would be the fourth act of self-destructive austerity.  The August 2011 budget deal already sharply limited spending and the January 2013 “fiscal cliff” deal raised taxes on the wealthiest Americans and restored the full payroll tax.  The cumulative effect of these three forms of austerity has already strangled the (modest) recovery – adding the Sequester, particularly given the Eurozone’s austerity-induced recession, could tip us into a gratuitous recession.

Second, the Sequester is a particularly stupid way to inflict austerity on a Nation.  It is a bad combination of across the board cuts – but with many exemptions that lead to the cuts concentrating heavily in many vital programs that are already badly underfunded.

Third, conservatives purport to believe in what Paul Krugman derisively calls the “confidence fairy.”  They assert that uncertainty explains our inadequate demand.  The absurd, self-destructive austerity deals induced or threatened by the Sequester have caused recurrent crises and maximized uncertainty.  They also show that the U.S. is not ready for prime time.

When he acted to save the Sequester, Obama proved that he preferred the Sequester to the alternative.  When the alternative threatened by the Republicans was causing a default on the U.S. debt (by refusing to increase the debt limit), one could understand Obama’s preference (though even there I would have called the Republican bluff).  The Republicans, however, had extended the debt limit in both of the cases that President Obama acted to save the Sequester in 2011.

Similarly, President Obama has revealed his real preferences in the current blame game by not calling for a clean bill eliminating the Sequester.  It is striking that as far as I know (1) neither Obama nor any administration official has called for the elimination of the Sequester and (2) we have a fairly silly blame game about how the Sequester was created without discussing the implications of Obama’s continuing failure to call for the elimination of the Sequester despite his knowledge that it is highly self-destructive.

The only logical inference that can be drawn is that Obama remains committed to inflicting the “Grand Bargain” (really, the Grand Betrayal) on the Nation in his quest for a “legacy” and continues to believe that the Sequester provides him the essential leverage he feels he needs to coerce Senate progressives to adopt austerity, make deep cuts in vital social programs, and to begin to unravel the safety net.  Obama’s newest budget offer includes cuts to the safety net and provides that 2/3 of the austerity inflicted would consist of spending cuts instead of tax increases.  When that package is one’s starting position the end result of any deal will be far worse.

In any event, there is a clear answer to how to help our Nation.  Both Parties should agree tomorrow to do a clean deal eliminating the Sequester without any conditions.   By doing so, Obama would demonstrate that he had no desire to inflict the Grand Betrayal.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @williamkblack

27 Responses to Why Obama Refuses to Kill the Sequester

  1. In any event, there is a clear answer to how to help our Nation. Both Parties should agree tomorrow to do a clean deal eliminating the Sequester without any conditions. By doing so, Obama would demonstrate that he had no desire to inflict the Grand Betrayal.

    I don’t think he has the balls or the smarts. I can’t believe I’m writing this. I campaigned for him in 2008 24/7.

    • While no Obama fan (I voted most artdently for Dr. Jill Stein), I seriously doubt if it is a matter of either testicular fortitude or intelligence, it is simply the game plan in the useless Political Theater of the Absurd, just as Clinton appointed Peter G. Peterson to his commission “to end welfare as we know it” and appointed Peterson/Kissinger lackey Erskine Bowles as his chief of staff, Obama would appoint Erskine Bowles to that phony committee which spewed for this Sequestration nonsense!

      http://www.sourcewatch.org/index.php?title=Portal:Fix_the_Debt

      The plutocracy, or Transnational Capitalist Class, demands austerity for all, in Europe, Asia and the Americas — I believe it is really that simple!

  2. I would not be surprised if over forty million Americans are living in poverty when President Obama leaves office. In the words of Bob Barker, “This guy sucks!”

  3. Obama has clearly lost his way – – if he ever knew what was the right way to begin with (which I doubt.)

  4. No, MRW, I don’t think this is a matter of whether Obama has the “balls or the smarts”. If you look at his record, his actions say it all. Besides this sequester lie, consider:

    1. Obama has used his office to prevent all the big bankers who caused the global financial crisis from being prosecuted. Note that Obama has no opposition there, it is 100% inside of the executive branch. And that announcement to placate OWS of a special commission? It didn’t even rise to the level of a joke.

    2. Obama has protected those who engaged in waterboarding and sanctioned the prosecution of a CIA officer who spoke out about it – Kiriakou.

    3. Obama installed executives in charge of Fannie and Freddy who did the opposite of what he implied they would do for homeowners. Those guys simply pumped up their own paychecks and screwed individuals over. Obama did nothing about it.

    4. Obama rammed through a deal with states that bribed those states to drop prosecutions of the criminal bankers. That cut off the last avenue by which that gang of criminals could be gotten at by the legal system.

    5. Obama oversaw the use of methods worthy of the KGB in its prime to get Julian Assange on trumped up charges using puppets in Sweden.

    There is more, just take a close look at Obama’s record. But the above should tell you what you need to know about Obama. So-called ‘progressive’ actions by Obama are extremely rare. In fact, I only know of one, the health care bill, and I really don’t think that was Obama’s idea or interest. I think the only reason Obama did the health care bill was because Hilary demanded it as a condition of becoming Secretary of State.

  5. I suppose Congress and the Executive Branch just don’t understand how BIG the USA has become. Both branches are acting like we’re still in the 1960s and on the gold standard. But since it is incredulous that they don’t really understand how modern economies work, the only logical conclusion is that both branches have essentially been totally corrupted by big money’s influence in politics. Since everyone except BIG money is hurt in austerity. Income disparity grows. Stocks of working people are stolen from them by rapacious short sellers who “buy when there is blood in the streets.” We need an independent commission for an omnibus rebuilding of the electoral system in this nation. We hope to have an announcement about such an effort to do this by constitutional amendment in the near future. Once and for all. Anyone interested please contact me. You can also follow the progress on @jmdenn.

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  7. Years ago I used to consult for small businesses who were in the process of upgrading or computerizing their books for, and a good deal of these clients were in a big mess when they came to me, a mess brought about by the bumbling and ineptitude of their bookkeepers or accountants. For example, the comptroller for one of my clients had somehow personally “lost” all the records and transactions for the outstanding accounts receivable of a major credit card company-a third of a million dollars in receivables just went “poof” and they had failed to maintain regular data backups nor an adequate paper trail filing system from which they could easily reassemble the records. What these clients seemed to share in common was this notion they were hostage to the bungler–that despite the egregious failings, getting rid of those who put them in this mess was absolutely out-of-the-question, at least for the time being. The feeling seemed to be, “they may have made this mess but I’m stuck with them because they’re the only ones who have the power to fix it.” Many small businesspersons, I came to see first hand, consider the intricacies of their financial records to be a Deep Mystery and look upon those that manage their books as financial shamans.

    Trying to understand Obama’s pov, I can’t help but be reminded of these clients and the strange hold even incompetent accountants had over them, especially when they were deeply deeply anxious about the disarray these incompetents made of their financial records. Obama seems to behave as if he has to “stick with” the same Wall Street wizards and their mysterious ju-ju because the economy they broke is so weak and fragile, and they’re the only ones who can undo the curse and save it.

    • Yes, that’s a possibility. It jives with the way that he invited all the top bankers to the White House at the start of his administration to assure them they wouldn’t be prosecuted. The “total putz president” theory does hold water.

      In 2008 a political operator I know well warned me about Obama. She is a heavy, heavy democrat-progressive who worked for Clinton doing lobbying for his legislation, campaigner for civil rights, the works. She is the kind who always gets out, hits the phones, and flies around the country to walk door to door in states across the country. She told me, “He’s a Chicago pol, a pure operator with no principles of his own. Don’t go near him.” I voted for him anyway. I tend to think McCain would have been better but he had that bizarre vice-presidential creature-feature that he chose.

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  9. @Demythify

    Very nice analogy… and I couldn’t agree more.

    The vast majority of Presidents (of countries or businesses) do not have high level competence in all aspects of a given organisation, and understanding the mess WS had created would be beyond even those that may have had a working knowledge of finance. As frustrating as the past four years have been, every time I stop to evaluate the mess rationally, I am forced to admit the odds of me going down the same rabbit hole are very high.

    Once the decision was made to go with the same group the “get out of jail card” was a given.

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  11. The problem is Obama’s main policy is raising taxes, and if the sequester helps home do that, then he is for it. The Dems have run on a platform that increasing taxes will fix the economy, and fix many other ills.

    • Raising taxes is exactly what needs to happen. Taxes need to go up massively on the wealthiest. The USA is dead last among developed nations, but our middle class rate is not low. That is why we have a problem. It’s called wealth transfer from the poor and middle class to the rich (AKA theft by the rich).
      Country Tax:GDP
      Denmark 48%
      Sweden 46%
      Italy 44%
      Belgium 43%
      Finland 43%
      Austria 43%
      France 42%
      Iceland 41%
      Norway 41%
      Cyprus 39%
      Netherlands 39%
      Hungary 39%
      Slovenia 38%
      Luxembourg 38%
      Germany 37%
      Portugal 37%
      Czech Republic 35%
      Malta 35%
      Poland 34%
      UK 34%
      Bulgaria 33%
      Estonia 32%
      Spain 31%
      Lithuania 30%
      Switzerland 30%
      Greece 29%
      Slovakia 29%
      Latvia 29%
      Japan 28%
      Romania 28%
      Ireland 28%
      Croatia 27%
      Turkey 25%
      USA 24%

      • Obama raised taxes on the wealthy, the middle, and the poor in the name of fixing something that does not need to be fixed – the deficit. Both parties are focused on the canard that we have a budget problem, when we do not have any such thing. Taxes absolutely do not need to go up at all. Governmnet spending needs to go up and taxes need to go down to get us to full employment. How that government spending gets dispersed to different economic classes is up to congress, and has ZERO to do with taxes. Obama is also, like Republicans, cutting social security in the name of fixing a non-existent debt problem. Bothe parties are guilty.

        • Mcwop

          Then don’t make foolish comments like “Obama’s main policy is raising taxes!” Secondly, I am not a citizen of your pathetic excuse for a functioning republic, nor would I ever be… unfortunately, your country plays host (and gorges on the crumbs they leave behind or decide to spread around to willing partners in crime) to most of the criminals involved in blowing up the world’s financial system for personal gain… with a psychopathic lack of empathy for the resulting carnage.

          Obama has a mandate to reduce the deficit by clawing back some of the ridiculous tax breaks given to the uber rich by the GOP over the years, and is willing to go along with some reasonable cuts even though (as you say) it is the wrong thing to do at this point. The issue being, unlike you, he has to throw the GOP Leadership some crumbs or nothing gets done… ever! Surely you understand that a legislative position must always include elements of “runway foaming”… sad but true.

          “Monetary system” and “functions” in the same sentence… hmmmm! You may want to do a little more studying on that oxymoron and finally, I am quite aware of the dysfunction in the monetary system, but thank you for the sage advice.

          • Please share your country of origin – I sure hope it is not austerity central in Europe. Fine Obama is mandated with reducing the deficit, and is choosing to do it largely on the backs of the poor and middle classes through tax increases and reduced benefits. Further, reducing our deficit will hurt the lower classes and keeps unemployment high. Some legislative bargain as the deficit does not need fixing.

            I think your main hang up now, is that you thought I was some ditto head and chose to engage in a name calling diatribe rather than a discussion.

            • @SRV – FWIW, I quite agree that the central problem the world economy has today is Wall Street’s bankers. They are a criminal gang. For a while I hoped that the EU would go after the boys at Goldman-Sachs, etc. But no.

              So, the Europeans are no better really. Nobody is taking the necessary stand. And unfortunately, history says that will end in global war. We shall see.

              Munching on nice-sounding phrases like “lower taxes and raise deficits” is not enough.

            • You’re right (my bad)!

              I’m an anti fiat guy and trade (actually more investing with some trading)) in real money… the metals. Many of the metals sites are full of “ditto heads” and I do like to “go off” on the odd one just to try to burst the bubble… not much of that here and I should have been more aware.

              However, you seem to be stuck on the echo chamber stuff from the right, or did not catch my point. He must agree to some deficit reduction to have any chance of further stimulation, and he certainly does not choose to “do it largely on the backs of the poor and middle classes through tax increases”… he made a deal to get the revenue he needed, and hitting the middle and lower classes were the work of the other side (cause “so many of those freeloading takers don’t even pay income tax”).

              Unfortunately, your government is completely dysfunctional, and the entire world will join you in suffering the consequences (don’t get me wrong, most are in various states of dysfunction but the US is clearly leading the way). President’s, unless they get control of the House and Senate, must deal with the sad realities of dysfunction… to blame them for the minutia of any legislation is unreasonable in my opinion.

              SRV
              Toronto

    • @ Mcwop

      Don’t worry, we can fix this… start with adding a little CNN to your FOX diet, then slowly throw in the odd mainstream newspaper piece. If able to keep this down, you’re good to go with small doses of NBC until reality begins to enlighten you.

      Seems to me there was presidential election in November, and the President ran on a platform of “balanced” cuts and revenue to replace the sequester (taxes on the top 1%, corporations and cuts). The GOP chooses to serve it’s corporate masters rather than the will of the majority in a free and open (oh, except for the various GOP voter suppression schemes… now continuing in the Supreme Court of Corporations) election.

      BTW, did Rush tell you the sequester would “help him raise taxes?” If you’re curious, it does not… so don’t worry, you’ll still be able to deduct the cost of the purchase and operating costs of those private jets in your driveway!

      • SRV, first off I am not a Republican, nor do I watch Fox News or CNN. I find it odd that you read an MMT oriented Blog, because you clearly do not understand the function of taxes at the federal level (it’s not for revenue), and how deficits add to our economy. Taxes need to come down, and deficits need to go up to get us back to full employment. That the governmnet wisely spends the deficit moeny into the economy and direct it to lower income folks is also important. Obama and the Republicans are both doing exactly the wrong things. So take off your political party blinders and understand how the modern monetary system actually functions.

        • First, the idea that taxes are not for revenue is:
          A.) A theory, never tested in the real world. We saw one of those (Marxism) create havoc/horrors in the last century.
          B.) Untrue even within MMT if the nation is not sovereign over its currency.
          C.) Requires cancellation removal of mechanisms in the monetary system that not everyone agrees with to achieve MMT’s claims.

          Second, the claim that ‘taxes need to come down’ is based on a theory that has never been tested. The implicit idea that ‘full employment’ (how do you define that?) is an important goal is an idea that is without support. It is argued on a moral basis, which is exactly how Marxism argued for collectivism and centralized economic planning. The evidence (for instance from the late 1990’s bubble years) for something approaching full employment is that it is correlated with serious economic pathology.

          Third, claiming that the wisest deficit spending is directed to lower income folks is without support. As the adage goes, “Teach a man to fish he eats for a lifetime. Give a man a fish he eats for today.” The highest two returns on investment by government were the interstate highway system and Apollo space program.

          A general criticism of MMT is that it treats all money as equal. It ignores productivity and the real economy of utility/goods/services/resources vs the money ‘economy’. The former produces and is the only thing of actual value. Money is a psychological construct we have created. Money exists because we have a game that says so, an agreement between us, a measuring device.

          By putting government spending into high ROI projects, the real economy grows.

          What you are really talking about is fairness in the system and income redistribution. By the way, perfect income redistribution is required for the neo-classical economic model to work. To do that, you must have highly indexed tax rates. Back in the 1950’s (probably way before you were born MCWOP) top marginal tax rates were above 90%. We had an excellent economy and high employment.

          • First I was talking about our sovereign currency. Two, if my taxes go down, my take home discretionary pay goes up – that is just fact. I may not spend it etc… But I do have more to spend. Taxes not being for revenue is somewhat proven, as we have run deficits for a long time without inflation. Japan has etc….

            Yes I underside the role of productivity, this is why social security is constrained by future productivity, and not necessarily the trust fund “running out of money”.

            If you want better income distribution then you must deficit spend on the lower income groups and that is up to congress, they can do it and they don’t need to raise taxes to make it happen as proven by decades of deficits.

            You want increased taxes on the rich, and that is fine. But hiking those taxes does not mean that money is then handed to poorer folks increasing their incomes. The latter only happens if congress increase spending toward that group, and those are not mutually exclusive.

            • Lower taxes on the middle class and poor results in more spending. I’m with you there. Lower taxes on the wealthiest creates incentive to rape corporations by their management and uninvest, as we have seen progressively over the past several decades. (Mitt Romney is an archetypal example of a destructive corporate pillager.

              There is more than one way to draw the lower income groups into making more. A great example was Apollo. Government spending that creates high technology and high value creation jobs creates demand for education and skills. That demand draws in more people to make that happen. Strong support for schooling and health care – when coupled with demand for what schools turn out – creates a strong economy. Without demand for that education you have Egypt or Tunisia. Vegetable sellers with college degrees. The USA is well along that road.

              Those decades of deficits – there you get into “untested theory” territory. Because deficits have historically been managed as a percentage of GDP and of debt service fraction of taxes.

              The idea that MMT advocates put forward, that handing everything over to the politicians, when those same politicians are completely incapable of simple regulation of our current banking system? Truly, I think that is a sign of brain damage. And Bernard Lietaer quite disagrees with that direction for a very simple reason. It makes the system as a whole more centralized and simple. That is correlated with economic breakdown. Bernie advocates for many more currencies so that there is more chaos. Chaos, you see, (in the mathematical sense) has great stability.

              • Yes deficits are sometimes managed as a % of GDP like in Greece and Spain, which is why they have crumbled, so far as unemployment is concerned. They would be better served as soveriegn currency issuers free to run higher deficits that add money to their Economies to pay teachers etc… Right now the U.S. is following the austerity path, and while there are political realities, it is simply the wrong path.

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