The Greatest Sequester Lie of All: We’ve Already Saved $84 Billion!

The sequester is rapidly approaching. If no one stops it, we’ll experience automatic and devastating spending cuts of $84 billion between now and this fall.

There are many insane things about this, but one in particular strikes me as ludicrous beyond comprehension: the deficit has already shrunk by $84 billion so far this fiscal year.

Get it? The whole point of the sequester was to cut the deficit—meaning the difference between what the government makes in taxes and what it spends. Yet through natural forces, the deficit has already been cut by essentially the same amount the sequester would cut.

Why everyone—the president, Congress, the commentariat—is ignoring this blinding truth is beyond me. What I do know, is how we got to this place. And it’s important to understanding the lie behind the sequester, and the actual economic forces at work.

When the sequester was set in motion in the summer of 2011, the government was about to complete its second straight fiscal year with a $1.3 trillion deficit.

But our budget situation isn’t static. It’s cyclical. When the economy slumps, tax revenues from payroll, income, and corporate taxes fall. At the same time, spending on unemployment benefits rises and the political system provides stimulus through tax cuts or higher spending. That’s what happened in the 2009-2011 period. So the deficit quickly grows by big leaps and chunks.

This also works in the other direction. When the economy improves, and more people go back to work, receipts from corporate, payroll, and income taxes rise at the same time that money spent on unemployment benefits decline. And so the deficit can decline quickly. What’s more, in January 2013, taxes rose significantly. The Social Security payroll tax rose from 4.2 percent of income up to $113,700 to 6.2 percent (that’s an increase of almost 48 percent), while taxes on very high earners rose a few basis points.

Consider this. We’ve had sustained, significant job growth for nearly three years. In January 2013, there were 2.06 million more people with payroll jobs than in January 2012, according to the Bureau of Labor Statistics. That’s more people working, at slightly higher wages, and paying taxes at higher rates. What do you get? More money.

Check out the Treasury Monthly Statement for January. Through the first four months of fiscal 2013 the government has collected $468 billion in individual income taxes, up 15.8 percent from $404 billion in the first four months of fiscal 2012.

Also, through the first four months of fiscal 2013, social insurance and retirement taxes (Social Security, Medicare) came in at a $254.9 billion, compared with $241.1 billion in the first four months of fiscal 2012—an increase of $13.8 billion, or 5.7 percent. So far this fiscal year, the combined receipts of taxes tied to jobs and employment are $723 billion, up $77.9 billion from $645 billion in the first four months of fiscal 2012. That’s a 12 percent increase.

At the same time, we’re spending less on unemployment benefits. First-time unemployment claims continue to hover at the relatively high level of 360,000. But thanks to an improving jobs market and the expiration of extended unemployment benefits, the number of people receiving benefits has fallen sharply. In the most recent week, 5.61 million Americans were receiving benefits, a decline of 1.876 million, or 25 percent, from a year ago. So the amount of money spent on unemployment benefits is declining sharply. In the first four months of fiscal 2013, the sum spent on state unemployment benefit was $25.28 billion, compared with $33.1billion in the first four months of fiscal 2012—down 24 percent. (See page 12 of the January Treasury Monthly Statement)

All told, rising payroll-tax collections and declining unemployment have produced  $86 billion of deficit reduction in the first four months of fiscal 2013—which is almost exactly the amount the sequester hopes to achieve. Now, assume that these trends continue through the remaining eight months of this fiscal year—i.e. that employment-related taxes rise by 12 percent for fiscal 2013, and spending on unemployment benefits declines by 24 percent. That would mean an extra $228 billion in revenue infiscal 2013 compared with fiscal 2012, and $21.6 billion less in spending on unemployment benefits—or $249.6 billion in deficit reduction. That’s three times the amount of deficit reduction the sequester will produce.

The cure for deficits isn’t grand bargains, mindless austerity, brinksmanship, or needlessly cutting back on social insurance. Rather, it’s sustained growth, rising employment, and rising wages—taxed at appropriate levels. The smart move to avoid the sequester would be to simply repeal it, and then watch the deficit keep shrinking.