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What Does Sequestration Really Mean?

If you have been watching the news then you know that the federal government is going to be required to cut $85 billion out of their budget unless congress passes a law to avoid or change it before March 1st.

$85 billion is a heck of a lot of money. It’s so big it’s hard to understand what it really means. Here are a few comparisons that might make sense.

With $85 billion the government could buy UPS, which currently has a market cap of about $78 billion. That’s about the 70th largest company in the world. Wowzers.

It’s also enough to send every single household in America a check for $642.42. Instead of cutting that spending, the government could reduce spending elsewhere by $85 billion, and then send everyone those unique personal checks. Talk about stimulating the economy!

$85 billion is also enough money to pay off 10% of the total American consumer credit card debt. Imagine how awesome people with credit card debt would feel if the government wiped out 10% of their credit card debt!

This $85 billion sounds like a whole lot of money. Heck, it sounds like so much maybe this will solve our debt problem and return America to financial sustainability.

Or maybe not.

$85 Billion is a Drop in the Bucket for the U.S. Government

Let’s pretend that we actually go through with cutting $85 billion out of the federal budget (which I personally can’t possibly see happening. Politicians always kick the can down the road).

To make it easier to understand, let’s scale the numbers to reflect a typical American family.

us capitol
photo credit: ThatMakesThree

The U.S. Government is like a family that currently has $166, 217 in debt. That’s a lot of debt, and unfortunately the family only makes $29,000 a year (tax revenue). To make matters worse, this family spends $38,000 a year (federal spending), meaning they have to go $9,000 deeper in debt every year (federal deficit) just to pay their bills.

If this “family” were to bite the bullet and go through sequestration cuts, it would cut a whopping $850 out of their budget. They would go from spending $38,000 a year to $37,150 a year. They would still have to borrow $8,150 and add that much to their debt (which is already at $166,000!).

If a family came to you and said they had $166,000 in debt and wanted to borrow another $9,000, would you give it to them? I would hope not! Is borrowing $8,150 really much better? Again it’s pretty clear the answer is “no”.

The Government Isn’t Serious about Fiscal Responsibility

Unfortunately the federal government isn’t serious about fiscal responsibility. The sequestration cuts are less than 10% of our current deficit. We’d still need to cut another $815 billion just to stop borrowing money.

This has a serious impact on your personal finances. If the government becomes financially insolvent then you and your family won’t get social security or medicare when you get older. If US government debt gets downgraded again then many “safe” investment vehicles like treasury bonds will become very risky and could lose money.

The US government needs to make drastic spending cuts to become financially solvent (and no, $85 billion isn’t drastic) or else we could be in for a world of trouble when our federal government can’t pay its bills.

Readers: Are you worried about the US government’s spending problem? If not, how much further in debt can the country go before you’ll start to get worried?

16 thoughts on “What Does Sequestration Really Mean?”

  1. Kevin,

    Just my opinion, but I believe the “problem” is that the sequester is mostly, if not entirely, applied to the discretionary component of government spending. Rather than addressing the real problem, entitlements, we are applying a dull knife to cutting [pick your favorite area like defense or education].

    Why not make some simple changes like means testing, not capping social security contributions, using a better measure for inflation, etc.?

    …Tim

    1. If you can find a way to truly balance the budget (aka eliminate the deficit) without cutting $85 billion from discretionary spending, I’d love to hear it.

      If the goal is truly fiscal responsibility, then we can’t pretend cutting $85 billion from anything is too much.

      1. Kevin,

        I wasn’t making a point about eliminating the deficit. My point was that cutting $85 billion from discretionary and doing NOTHING to reform entitlements is the bigger problem, not that we should ignore discretionary.

        …Tim

        1. I completely agree we need to address entitlements. However, I’m not going to complain about $85 billion in discretionary cuts because those are necessary as well as the entitlement cuts.

          1. “Those cuts are necessary”? Well you must paint with broad strokes. Those cuts are not only discretionary funds but also a large portion of Defense spending. In fact, a very large majority of Dept. of Defense employees will be furloughed (myself included) if sequestration goes through. This also includes DoD employees stationed overseas serving alongside their service men and women counterparts (myself included). So I won’t argue that cuts are necessary, but I don’t think they should be automatic across the board. Nor do I feel the public is grasping what “sequestration” really means. Yes, it’s only $85 billion and solves nothing in regards to our overall debt. However, a large part of that $85 billion is coming straight from the homes of hard working Americans.

          2. I never like to hear about people losing their jobs, but unfortunately the federal government is too big. As it shrinks, people are going to lose their jobs.

            Also, I need to correct your statement that “a large majority” of defense employees will lose their jobs. According to this article (http://www.defensenews.com/article/20120827/DEFREG02/308270002/108-000-DoD-Civilians-Would-Lose-Jobs-Under-Sequestration-Report), only 13.7% of DoD employees will lose their job. That’s a lot, but not even close to a majority, much less a large majority.

            Also, I think it is important for every American to take responsibility for the decisions they make. If you choose to work for a company, in this case the federal government, that carries more debt than any other company in the world and is losing about a trillion dollars each year, then you shouldn’t be surprised when they decide to cut spending and lay off employees.

            Again I am sorry that you might lose your job, but I hope you are able to find employment soon, and hopefully with a company with a bit more financial stability.

          3. You are right I confused layoffs and furlough. However the fact remains that we are borrowing almost a trillion dollars a year and that’s not sustainable.

            I’d rather millions of people lose their jobs than have everyone in the country lose all of their wealth because the dollar collapses under unsustainable government spending.

        2. One question though: define entitlement please?

          In case you mean medicare/medicaid/SocialSecurity (44% of the budget), then anyone above 65 should be worried. That why the GOP will never do anything, because the majority of its constituent are on the white older side with even older parents. So medicaid/medicare is a way to take the tax-money of young people (all color) and give it to old white…

          the other big spending is military: 19% 619b$

          If you really want to start working on the problem, start with one trillion cut, that’s roughly 25% of the budget. That should really help! Although only in 16 years…

          1. Kevin, just to clarify for you and your readers “furlough” does not equate to “laid off”. DoD employees which are eligible for furlough, have their eligible working days cut. IE several federal agencies are no longer having their workers coming in on Fridays. What this means is that those affected Federal employees essentially get a 20% pay cut; but, they at least get to keep their jobs. Cheers.

  2. “Sequestration” is just another move in the sports contest known as “politics.” It should be remembered (but isn’t, because the sheeple have pitiful memory) that sequestration was originally promoted by Obama — but now labeled by Obama as a part of the “vast righ-wing conspiracy” as he speaks out of the other side of his face.

    You are correct. The government is not serious about fiscal responsibility. That is because nearly every member of Congress was elected by voters who have discovered that they can vote themselves the proceeds of the Treasury. And, as Thomas Jefferson observed, the end of the Republic is nigh. It’s not a matter of “if” anymore, it’s “how soon.”

    My prediction: In the next year or two. Which I hope is wrong, but significant parts of our Republic have already been destroyed.

    1. I certainly hope you are wrong as well. Unfortunately we don’t even have many politicians that are running on the fiscal responsibility platform.

      Almost every election is among a Republican who wants to continue crazy deficit spending, a Democrat who wants to continue crazy deficit spending, and a bunch of third party candidates that no one takes seriously.

      The entire world economy needs a fiscal correction, and I’m not looking forward to how it’s going to happen.

  3. Kevin,

    Unfortunately I don’t think you’ve done all your homework on this one. My statement “a very large majority of Dept. of Defense employees will be furloughed” is quite true. I think you may not understand the difference between “losing your job” and being “furloughed” ; they’re quite different. I’ll list a couple sources for your review but bottom line is within the defense department a “very large majority of Dept. of Defense employees will be furloughed” in addition to a number of people actually losing their jobs. I’ve served our country on four different continents within numerous countries in a variety of capacities; If you think I chose to work for the government for the money and it’s financial stability then again I think you may have missed the mark.

    –general article indicating DoD will face massive furloughs–http://articles.washingtonpost.com/2013-02-11/national/37039716_1_federal-employees-furloughs-budget-cuts
    –general article indicating what other agencies will face–http://www.washingtonpost.com/wp-srv/special/politics/sequestration-federal-agency-impact/?hpid=z2
    –Official Statement from Secretary of Defense Leon Panetta- “should sequestration occurr… DoD will be forced to place the vast majority of its civilian workforce on administrative furlough”–
    http://www.defense.gov/releases/release.aspx?releaseid=15826

  4. The sad thing is that even though $85 billion is a drop in the bucket for the government, they still can’t manage to compromise. How are they ever supposed to fix the system as a whole when they can’t even fix one small part of it? It’s like a family up to its eyeballs in debt and about to go into foreclosure and yet they can’t even agree on cutting a $20/month newspaper subscription.

  5. Very nice illustration of the problem in understandable terms. Do our Congressman or President have this type of grasp on the problem? I have watched this problem go on for decades and it is sickening that it has gotten this bad. The other nasty side of this is to increase revenue in this household and the only way to do this is to increase taxes. How is that for a further unpleasant reality?

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