SEQUESTER THIS!The question is no longer whether the automatic spending cuts of budget “sequestration” will start to take effect on Friday. The question is how long lawmakers are willing to let those cuts stay in place. That, in turn, will depend on how quickly—and how severely—the cuts affect people’s lives.

President Obama and his allies predict dire consequences, for the economy and for a wide array of government services. On Sunday, they released a report detailing how the cuts would play out in particular states. Kids in Georgia wouldn’t get their vaccines, defense contractors in Texas would lose work, teachers in Ohio would end up on furlough—the list goes on. Republicans and their allies have answered by suggesting the administration is exaggerating. “Over the next ten years, the sequester amounts to a $1.16 trillion cut, or roughly 3 cents on every federal dollar,” National Review editor Rich Lowry wrote on Friday. “If we can’t squeeze a couple of pennies out of every dollar, we might as well begin our great national bankruptcy proceedings right now.”

Sorry, but squeezing a couple of pennies out of every dollar in the next year is a terrible idea. In absolute terms, government spending is significantly higher than it was a decade ago. But that’s largely a product of two factors. One is health care, the cost of which the government shoulders mostly through Medicare and Medhttp://www.newrepublic.com/article/112521/sequester-how-low-can-spending-go?utm_source=The+New+Republic&utm_campaign=b65a6b2c0f-TNR_Daily_022613&utm_medium=emailicaid. The other is a temporary burst of spending from the Recovery Act, which was designed to stop the economy from collapsing in 2009. That spending is mostly finished anyway. And the sequester cuts woudln’t meaningfully reduce health care spending, though they would cut Medicare reimbursements. They would primarily affect “discretionary” spending, which includes everything from workplace safety inspections to defense spending to Head Start. As the graph here shows, discretionary spending—measured as a percentage of gross domestic product—is already lower than it was when Obama took office.¹ The sequester cuts would reduce it further. At those historically low levels, severe cuts to government services are virtually inevitable, whether or not they are precisely the ones that the administration is predicting.²

A trillion here, a trillion there.

A trillion for TARP, a trillion for TALF.

Throw in what’s in the “stimulus” package and you’re probably at close to $3 trillion.

So why not simply distribute $25,000 tax free to every U.S. taxpayer? There are 100 million of us, in round figures, so we’re talking about $2.5 trillion, give or take.

This is what two friends and I asked each other over lunch a Three Guys last week. After we got through the usual preliminaries, such as where can one buy hemlock these days, given that our actuarial matchup (two of us are over 70) with our resources leaves us as upside-down as the most strapped Corona del Mar mortgage victim, we started talking about the economy and how to rescue it.

Clearly, these institutional rescue plans are going nowhere. The pricing dichotomy – Uncle Sam either pays too little or too much – seems intractable and the recipients are surely undeserving. Even though there have been two big distress sales of toxic assets – by Merrill Lynch last fall and Legg Mason last week – at around 20 cents on the dollar, which might represent a pricing benchmark, I just don’t think the taxpayer should be put in the business of writing a “make whole” for either pigs or vultures, who in many cases may now be one ad the same. That is capitalism’s tragic paradox, unseen by Adam Smith, probably understood by Marx: the people who cause crashes frequently profit from them.

The problem is, everyone’s hanging around looking for a deal from the government that’ll yield a deal that’s better than fair to everyone except the taxpayer, and Geithner and his small and doughty band know it (the Treasury increasingly reminds me of Fort Zinderneuf in Beau Geste, with dead bodies propped up in the gun ports and Gary Cooper scuttling from post to post, firing at a superior force of Bedouins.) And the “infrastructure” solution, as I see it, is simply open-ended flapdoodle capable of inciting limitless political foolishness and private-sector thievery. Let’s not import Iraq back home.

Institutionally, what should be done immediately is to separate the good assets from the dubious. In the case of the “banks,” hive off depositary operations and wealth management from trading and arbitrage. At AIG, put a fence around the real insurance operations and let the CDS commitments go. Wipe out derivatives contracts that had no real third-party assets at risk (possibly as much as $30 trillion of “naked” puts,) that were nothing more or less than bets against the solvency and credit rating of insurers like AIG and Lehman, and let the rest negotiate settlements as best they can. All the crap can go into what I heard one English financial analyst on WNYC call “a giant international cesspit,” and let the scavengers fight over it like rats in a garbage dump. Isn’t this the kind of market solution propounded by (speaking of rats) the likes of Larry Kudlow?

The more I see what’s going on now, the better I think I grasp what really happened in the Depression. Why, by late 1940, there was so little trading and deal volume on Wall Street that people like my father, a 34-year-old partner at Lehman Brothers, enlisted in the U.S. Navy, figuring that FDR was going to get us into a war with Hitler and he might as well have a commission.

History proved Joe Thomas right in his assessment of his President’s intentions. By then, FDR probably understood that there was only one solution to the nation’s precarious economic condition: jobs, jobs, jobs. And that nothing would provide jobs – in the military, on the home front – more efficaciously than a war. And so it proved. Moreover, when the war was won, Washington grasped that millions of disemployed service people and defense workers might represent a brand new social and economic crisis and came up with the G.I.Bill. As opposed to the U.K., which sent its newly-demobbed Tommies back down the pits and got a Labor Government for its pains. I know of no more powerful example of the difference between the way a capitalist democracy is supposed to work and the way it isn’t . I should add my opinion that Ms. Pelosi (surely there can never have been a worse Speaker!) and other Capitol Hill idiots would never have devised a G.I. Bill, not in a millennium!

So let’s go back to the “Three Guys” scheme, as history will doubtless christen it. At $2.5 trillion, the money’s about the same as Washington plans to spend. Any way you cut it, relief is going to be funded in the people’s money, so why not let the people decide how to spend it? To some taxpayers, $25,000 will be a lot of money and will be spent on life’s necessities or to ease household financial crises: to pay off debts, to pay tuition, to catch up on mortgages. Others may use a sum like this as a down payment on a house. Businesses can be launched on $25K. To some, $25K won’t be that big a deal, so they’ll invest it or put it into a bank. Along the way, as it passes from hand to hand, as one person’s expenditure becomes another’s revenue and profit, it will become taxable, and Uncle will start to recapture his investment.

It really doesn’t matter how and where it gets spent and saved, because never forget, children, that every dollar spent is somewhere saved. The key is to keep that money hopping. To keep breaking it up into pieces, and moving those pieces along. If it coagulates in financial companies anxious to build up capital to support their CDO/CDS garbage, the main if not the entire purpose of the exercise is defeated. And this is exactly what is happening now.

It has got to stop. Parents of my generation were raised to understand that children are not to be rewarded for bad behaviors. Sadly, that view has faded. It’s time to turn back the clock and give the money to the 99,000,000 of us that had nothing to do with this mess!

Wall Street is still betting on a quick deal, but that confidence is misplaced, said Julia Coronado, chief North American economist at BNP Paribas. “Markets have been incredibly complacent about this,” she said. If a compromise cannot be found by Jan. 1, she said, “the markets will take that hard.”

Some hits — like a two percentage point increase in payroll taxes and the end of unemployment benefits for more than two million jobless Americans — would be felt right away. But other effects, like tens of billions in automatic spending cuts, to include both military and other programs, would be spread out between now and the end of the 2013 fiscal year in September. These could quickly be reversed if a compromise is found.

Similarly, the expiration of Bush-era tax cuts on Jan. 1 would not have a major impact on consumers if Congress quickly agreed to extend them for all but the wealthiest Americans in early 2013, as is widely expected.

Other probable changes, like a jump in taxes on capital gains and dividends, would most likely be felt over a broader period rather than as an immediate blow to the economy.

In the meantime, more observers are contemplating what the impact will be if Washington ignores the year-end deadline and waits until January or February to act.

Jan. 1 Slowly Morphs From Fiscal Deadline Into Horizon

I thought that Clinton’s speech at the Democratic Convention was disgustingly dishonest, even for him. The simple fact is that both Parties are owned by the Oligarchs and nothing is going to change until the system is reformed. If Romney is so concerned about the “47%” eating and getting medical care, why isn’t he equally worried that government intrusion into private capitalism, orchestrated by a former CEO of Goldman’s, pretending simultaneously to represent the interests of all the Republic was bailing out banksters who weren’t allowed to lose. Hypocrites all.

When it collapsed, due in part to bank-friendly policies that Rubin advocated, he made more than $100 million while others lost everything. “You have to view people in a fair light,” says Phil Angelides, co-chair of the Financial Crisis Inquiry Commission, who credits Rubin for much of the Clinton-era prosperity. “But on the other side of the ledger are key acts, such as the deregulation of derivatives, or stopping the Commodities Futures Trading Commission from regulating derivatives, that in the end weakened our financial system and exposed us to the risk of financial disaster.”

“Nobody on this planet represents more vividly the scam of the banking industry,” says Nassim Nicholas Taleb, author of The Black Swan. “He made $120 million from Citibank, which was technically insolvent. And now we, the taxpayers, are paying for it.”

Rethinking Robert Ruben

“Now, I say to you today my friends, even though we face the difficulties of today and tomorrow, I still have a dream. It is a dream deeply rooted in the American dream. I have a dream that one day this nation will rise up and live out the true meaning of its creed: – ‘We hold these truths to be self-evident, that all men are created equal.’” Martin Luther King Jr., August 28, 1963