BY ROBERT KINDEAD

NEWJERSEYNEWSROOM.COM

“Sequestration” is a word normally reserved for spelling bees.  In a few weeks, the term might cost New Jersey about $78 million, according to CBS News.

And, New Jersey can count itself lucky, if that’s all it costs the state.

Nationwide, the US Department of Defense (DOD) estimates that if sequestration is automatically invoked it will mean a total reduction of about $47 billion in annual military spending.

So, what the heck is sequestration?  The federal Budget Control Act of 2011 rules that discretionary spending, beginning in 2013, must be cut by $110 billion, split evenly between defense and non-defense spending according to Wikipedia.  Apparently, the government feels that “sequestration” is a clearer term than “enormous, automatic budget cuts.”

It is unclear how much the non-defense cuts might affect New Jersey at the moment.  However, the Garden State will likely be far less impacted than states like California, Virginia, Maryland and others where federal government programs have a very large financial footprint.

The sequestration issue is an element of a game of “fiscal chicken” wherein the Democrats and the Republicans have, on and off since the financial crisis of 2007-08, threatened to push the nation off the so-called fiscal cliff unless their respective financial ideologies are embraced in future federal budgets.  For the Republicans,
the call has been for increased defense spending, decreased entitlement spending (Medicare and social security primarily), and no additional taxes, especially for the wealthy.  For the Democrats, it’s spending to stimulate the economy, ironclad protection of current entitlements and increased taxes from all, especially the rich, to pay for it.

Each party has had to compromise its respective positions as various budget deadlines loom.  For example, on January 2, 2013, the president signed the American Taxpayer Relief Act of 2012 eliminating a significant amount of automatic tax increases, yet producing a 8.13% increase in revenue and 1.15% increase in spending for fiscal
year 2013.  If this act had not been passed, it is estimated that a married couple with two children, earning
$50,000 a year, would have experienced a 32% income tax increase, while a married couple with two children, earning $250,000 a year, would have experienced a 13% increase in income taxes.

The upcoming sequestration issue is just the second of a three-act political balancing routine. The next trip to the edge of national financial catastrophe will occur on May 19 when Congress must vote whether or not to increase the debt ceiling, that is the amount of money the US Treasury is permitted to pay for debts already incurred.

If no resolution is reached, the Treasury would in theory be in default, unable to pay the country’s debts.  This has never happened, not even in the depths of the Great Depression.  However, in 2011, the Congress flirted with default by delaying an increase in the debt ceiling until the last moment.

As a result, for the first time ever, the credit rating of the United States was downgraded, the stock market dropped dramatically, and borrowing costs rose significantly.  The AAA rating of US credit has not been restored.

Globally, most economists see this periodic visit to the fiscal cliff as unwarranted and destructive political posturing.  It is a phenomenon unique to American politics that damages faith in the dollar as an international currency and threatens the economic stability of every country in the world.