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Sequester 101: Is all this fuss really necessary?

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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.

Yes, tax policy and spending policy are vital elements of the mix. But both need to be paired with a growing economy.

Perception: Federal spending is out of control, thanks to President Obama.

Reality: The notion that federal spending is out of control is open to debate, but some of the overall numbers don’t look worse for Mr. Obama than for other presidents. Discretionary spending is poised to be lower this year than it was in 2008 or in 2009, the fiscal year during which Obama took office, as a share of GDP. That's according to historical budget numbers reported by the White House.

Recovery Act spending was large, but mainstream economists generally say the stimulus effort served a needed purpose, nudging the economy forward amid a deep recession.

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