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| President Barack Obama gestures as he speaks to reporters in the White House briefing room in Washington, Friday, March 1, 2013, following a meeting with congressional leaders regarding the automatic spending cuts. |
WASHINGTON
(AP) -- It's not the first time that government economic engineering has
produced a time bomb with a short fuse.
Back
in 2011, few lawmakers, if any, thought deep and indiscriminate spending
cuts, totaling about $85 billion and now starting to kick in, were a
smart idea.
The across-the-board cuts, set up
as a last-resort trigger and based on a mechanism used in the 1980s, are
a reality largely because President Barack Obama and House Speaker John
Boehner, R-Ohio, failed to find a way to stop them.
Republicans,
influenced by tea party and other conservative factions, insisted on
just spending cuts to narrow the deficit. Tax increases were out.
Obama and the Democratic-run Senate didn't budge from a mix of cuts and increased tax revenues.
"Arbitrary" and "stupid" Obama called the auto-pilot cuts, known as sequester.
But history shows a long trail of unintended consequences from government actions - or inaction:
-President
Franklin D. Roosevelt, after a solid re-election victory in 1936,
believed that the Great Depression was winding down. Unemployment was
declining and economic activity was coming back.
Roosevelt
and Congress believed it was time to cut free-flowing government
spending and raise taxes. The Federal Reserve tightened its financial
reins. But the fragile economy couldn't withstand the blows. The
Depression roared back, lasting until the 1940s when U.S. involvement in
World War II finally revived the economy.
-President
Ronald Reagan's ambitious 1986 overhaul of the tax code simplified
taxes and closed many loopholes, including repealing the popular tax
deduction for credit-card interest. Then people started borrowing
heavily against fast-rising equity in their homes; that interest still
was deductible.
But the practice eventually
helped put millions of homeowners under water on their mortgages when
the housing bubble burst, contributing to the 2007-2009 recession.
-The
Fed has kept short-term interest rates unusually low and printed money
to keep downward pressure on longer-term rates, easing borrowing for
businesses and individuals.
Yet retirees and
other savers are earning near-zero interest on bonds and savings
accounts, and many investors are jumping into riskier transactions in
search of higher returns.
Fed Chairman Ben
Bernanke and many mainstream economists argue that the Fed's stimulus
policies have helped the housing and financial sectors recover and kept
the downturn from getting worse.
One leading
Fed critic Sen. Bob Corker, R-Tenn., accused Bernanke at a hearing last
week of "throwing seniors under the bus" by driving down interest rates
on their savings to almost nothing.
-The tax
cuts of 2001 and 2003 were first proposed by Texas Gov. George W. Bush
as he campaigned for president in 2000. At the time, the economy was
enjoying rare multi-year budget surpluses and government economists were
predicting surpluses well into the future. Bush told cheering audiences
his tax cuts would return to taxpayers "what is rightfully yours."
Those
cuts long have outlived the surpluses, which vanished in Bush's first
year in office. Deficits returned with a vengeance and have grown ever
since.
But most of them remain today, trimmed
only slightly by the New Year's deal that ended Bush's tax breaks for
households making over $450,000 a year.
Economists
view those tax cuts as one of the biggest drains on the Treasury, and a
major contributor to the spiraling government debt.
-Wars
in Vietnam, Afghanistan and Iraq lasted far longer and cost much more,
in terms of U.S. lives and dollars, than anticipated.
-Social
Security has become one of the most expensive federal programs ever.
When it was created in the 1930s, the average life expectancy was about
65. Longer life expectancies and the coming retirements of millions of
baby boomers have put enormous strains on Social Security, as well as
Medicare and Medicaid.
And now the sequester.
"It's
not hard to come up with something better, yet all efforts to do so
went down the toilet for various reasons," said economist Bruce
Bartlett, who held economic posts in the Reagan and first Bush
administrations.
"And I think people didn't realize how wedded Republicans are to not raising taxes."
Still, no one really thought the cuts would happen, he added.
Stan
Collender, a former staffer on both the House and Senate budget
committees, said Congress is "very short-term focused. The longer-term
consequences are of very little concern to people who have to run for
re-election every two years," said Collender, now a partner at Quorvis
Communications, a financial consulting firm.
More
House districts have been redrawn in recent years with political
factors in mind, and that's tended to concentrate conservatives in
Republican districts and liberals in Democratic ones.
And set the terms of the debate on Capitol Hill.
"If
people in your district are hell bent on cutting spending, even if it
hurts the economy, and applaud your intransigence, then that's going to
be your priority and your vote, even if it's not necessarily good for
the country," Collender said.
The sequester
now in play is actually an updated version of the Gramm-Rudman-Hollings
Act of 1985.
There also was a small sequester in 1986, and a big one
planned for 1990.
The latter was avoided only
after President George H.W. Bush broke his "no new taxes" pledge to join
Democrats in a deficit-reduction compromise that raised taxes.
There
was a huge GOP backlash, one that many politicians believe contributed
to Bush's 1992 re-election defeat to Democrat Bill Clinton.
Clearly not the consequence Bush had in mind
