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We've Seen This 'Sequester' Movie Before

Friday, 1 Mar 2013 | 12:29 PM ET
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All of Washington, and much of the nation, are focused on the automatic spending cuts known as the "sequester," which went into effect today. These cuts have been described as repeatedly as "draconian," yet history tells a different tale.

(Read More: 'Sequester' Summit Begins at the White House)

The first sequester was introduced during the Reagan administration by the Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Reduction Act in 1985. Since then, five sequesters (or automatically triggered spending cuts) have been enacted between 1986 and 1991.

In 1986, the federal deficit was 5 percent of gross domestic product and the public debt was 39.5 percent of GDP. Today, the federal deficit is 8.5 percent of GDP and public debt is 74.2 percent of GDP. Our current situation is nearly twice as dire as it was at the time of the first sequestration, and it is clear that we need to control spending.

In the first instance of automatic cuts in 1986, $11.7 billion was cut across the board — that is 0.26 percent of GDP or 1.18 percent of federal spending at the time.

How do today's cuts stack up?

While politicians and pundits throw around the $85 billion number, the Congressional Budget Office has actually projected that the looming sequester will reduce spending by $42 billion in fiscal year 2013. That number amounts to 1.10 percent of federal spending for the year, or 0.27 percent of GDP (based on 2012 GDP). If those numbers seem familiar it is because they are almost exactly the same as the cuts in 1986 when put into context.

(Read More: Spinning Sequestration: Both Sides Are Doing It)

So how did the sequester impact our economy in the '80's?

In 1985, the year the law was written, unemployment was 7.2 percent. In 1986, when the first automatic spending cuts went into effect, it was 7.0 percent. By 1989, the unemployment rate had fallen to 5.3 percent.

But it must have had an impact on economic growth, you say? Uh, afraid not. According to the Bureau of Economic Analysis, the GDP continued to grow by better than 5 percent annually for the five-year period following those cuts. And, the Dow Jones Industrial Average spiked to new highs in 1987 and 1990.

Not only is there little historical indication of impending doom from these types of spending cuts, but the Dow Jones Industrial Average has hit its highest point since 2007 merely 48 hours before the cuts are to take place, indicating little-to-no market trepidation.

(Read More: Why You May Suffer From the 'Sequester Blahs')

Only time will tell how the politics of the sequester will play out. For now, it would seem that President Obama's communications strategy of laying this at the feet of Congressional Republicans has been effective — this, despite being the originator of the sequester idea, and waiting until after the cuts take effect to meet with Congressional leaders.

However, with an overwhelming number of Americans wanting spending reduction and deficit control, the White House strategy has the potential to backfire.

The White House should also be worried by the latest NBC/WSJ national poll, which indicates that 53 percent of Americans want to see at least the level of spending cuts called for in the sequester (and 39 percent want even deeper cuts).

In 1986, when the first sequester took place, the annual deficit was under 40 percent of GDP; today it is over 70 percent. The need to address this unsustainable trend is clear. The sequester is a good first step, but it only scratches the surface when it comes to Washington's spending problem.

(Previous Post: Fagen: Is Washington Enemy #1 for Business?)

Sara Taylor Fagen is a partner at DDC Advocacy and a former Political Director for President George W. Bush. She is also a CNBC contributor.

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