Unintended consequences to cuts no one thought would happen

By TOM RAUM, Associated Press Published: Mar 2, 2013 at 10:57 AM PDT Last Updated: Mar 2, 2013 at 11:38 AM PDT
Unintended consequences to cuts no one thought would happen
President Barack Obama pause 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. (AP Photo/Carolyn Kaster)
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