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Sequester 101: Is all this fuss really necessary?

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In the end, if the sequester forces Congress to talk constructively about the shape of fiscal policy, it could serve a purpose beyond the spending cuts.

“Debate is healthy and long overdue on entitlements,” economist John Silvia of Wells Fargo writes in a recent analysis of US fiscal affairs. Programs like Medicare, Medicaid, and Social Security “make up the largest share of federal spending and the fastest growing segment of spending.”

But where does that conversation need to go? Here’s a look at some of the arguments that some politicians and pundits are making in the fiscal debate:

Perception: We could solve this whole deficit problem if we’d just _________ (insert solution here: raise taxes, cut spending, etc.)

Reality: If you hear an argument saying the solution is all about some tax hikes, or spending cuts, or even a mix of the two, remember this: There’s another big part of the equation called economic growth. Economists worry when the national debt is large or rising relative to the size of the economy.

Right now, it appears to fit the definition of “large” – with gross federal debt roughly equal to a year’s gross domestic product (GDP). When the debt was similarly high after World War II, the nation successfully reduced that debt during the next two decades, as a share of GDP. Annual federal deficits weren’t eliminated, but they were outpaced by growth in the private sector.

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