The Sequester, Explained

—By Kevin Drum| Mother Jones

Where did the whole idea of sequestration originate? 

It goes back to 1985. The tax cuts of Ronald's Reagan early years, combined with his aggressive defense buildup, produced a growing budget deficit that eventually prompted passage of the Gramm-Rudman-Hollings Act. GRH set out a series of ambitious deficit reduction targets, and to put teeth into them it specified that if the targets weren't met, money would automatically be "sequestered," or held back, by the Treasury Department from the agencies to which it was originally appropriated. The act was declared unconstitutional in 1986, and a new version was passed in 1987.

Sequestration never really worked, though, and it was repealed in 1990 and replaced by a new budget deal. After that, it disappeared down the Washington, DC, memory hole for the next 20 years.

What about the 2013 version? Where did that come from? 

 In the summer of 2011, Republicans decided to hold the country hostage, insisting that they'd refuse to raise the debt ceiling unless President Obama agreed to substantial deficit reduction.

After months of negotiations over a "grand bargain" finally broke down in July, Republicans proposed a plan that would (a) make some cuts immediately and (b) create a bipartisan committee to propose further cuts down the road. But they wanted some kind of automatic trigger in case the committee couldn't agree on those further cuts, so the White House hauled out sequestration from the dustbin of history as an enforcement mechanism. It would go into effect automatically if no deal was reached.

In the end, no immediate cuts were made, but a "supercommittee" was set up to propose $1.5 trillion in deficit reduction later in the year. To make sure everyone was motivated to make a deal, the sequester was designed to be brutal: a set of immediate, across-the-board cuts to both defense spending and domestic spending, starting on January 1, 2013. The idea was that everyone would hate this so much they'd be sure to agree on a substitute.

Needless to say, no such agreement was reached. So now we're stuck with the automatic sequestration cuts.

How big is the sequester?  

You'd think this would be an easy question to answer. In fact, it's surprisingly complicated! Are you ready?

The basic amount of the sequester is $1.2 trillion in deficit reduction over 10 years. But when you reduce spending, you also reduce interest on the national debt. This means that we only need $984 billion in actual program cuts. And since it's for 10 years, naturally that means we divide by nine to get annual spending cuts of $109 billion. For FY2013, this comes to $12 billion per month, because there are only nine months from January (when the sequester begins) through the end of the fiscal year in September.

But wait! The fiscal cliff deal in January delayed the sequester until March 1, so it also lopped off two months of cuts. This means that the total amount of spending cuts for this year clocks in at $85 billion.

So what gets cut? 

The sequester is split evenly between defense spending and domestic spending. The domestic half has two parts: Medicare and everything else. For Medicare, the sequester specifies a flat 2 percent cut in reimbursements. Doctors will continue to bill at their usual rate, but they'll only receive 98 cents on the dollar. According to the Congressional Budget Office, here's how the whole thing nets out (see Table 1-2):

• Defense: $42.7 billion
• Medicare: $9.9 billion
• Other domestic: $32.7 billion

Aside from Medicare, how are the other cuts divvied up?  

The sequester legislation requires the cuts to come evenly from every budget account. This means everything (with a few exceptions) gets cut the same amount. This is an especially stupid way to cut spending, since everyone agrees that some programs are more important than others, but that's the way it is. If you really want to torture yourself, you can read this Office of Management and Budget report, which contains 224 pages listing the sequester amounts from every single agency in the United States government. It's followed by another 158 mind-numbing pages of agency accounts that are exempt from the sequester.

But as stupid as this is, don't get too excited about it. It's only for FY2013, which lasts seven more months. After that, although the total amount stays in place ($109 billion, split evenly between defense and domestic spending), congressional appropriations committees have much more flexibility about how to juggle the cuts.

Aren't we still in a recession? What are these cuts going to do to the economy?  

Technically, we're no longer in a recession, but there's no question the economy remains weak. A big bunch of dumb spending cuts is about the last thing we need.

That said, the actual impact of the cuts is hazy. Among private forecasting firms, Macroeconomic Advisers figures the sequester will cut GDP by 0.7 percentage points, while IHS Global Insight puts it at 0.3 percent. Back before the sequester was delayed, CBO estimated 0.8 percentage points. Given a consensus growth forecast of about 2 percent for this year, this is a fairly substantial headwind. In terms of jobs, it will probably increase the unemployment rate by about half a percentage point. This is why Fed chairman Ben Bernanke basically told Congress on Tuesday that they were nuts to let the sequester proceed.

That's all sort of bloodless. How about some horror stories? You know, three-hour waits at airports because of TSA cutbacks, food poisoning epidemics thanks to USDA cutbacks, that sort of thing?  

The White House has been making a lot of hay over its 50-state breakdown of cutbacks. California, for example, will lose 1,200 teachers, 8,200 Head Start slots, 49,000 HIV tests, $5 million in meals for seniors, etc. You can see the forecasts for your state here. Aside from that, Wonkblog seems to be the go-to site for alarmist coverage of the sequester. Brad Plumer has the impact on R&D spending here. In an interview with Ezra Klein, former NIH director Elias Zerhouni says it will be a "disaster for research." Suzy Khimm interviews a former Homeland Security official here who says smuggling will increase. And MoJo's own Zaineb Mohammed lists six ways the sequester will hurt the environment here, including higher risk of damage from wildfires.

That's terrible! Does anyone have a plan to avoid the sequester? 

 Sure. Sort of. President Obama has proposed a substitute that includes about $1.1 trillion in spending cuts and $700 billion in new revenue. It was dead on arrival because Republicans are flatly unwilling to consider any plan that includes higher taxes. Back in December, Republicans in the House passed a bill that would have kept all the domestic cuts and replaced the defense cuts with yet more domestic cuts, mostly to anti-poverty programs. It was DOA too, for obvious reasons. House and Senate Democrats have plans as well.

But the truth is that there's probably no deal to be made. Republicans won't accept tax hikes, Democrats won't accept any bill that's exclusively spending cuts, and neither party is willing to just kill the sequester outright, which is the most sensible option. For now, all that's really happening is that both sides are barnstorming the country blaming the other guys. Obama seems to be winning that battle at the moment.

The Not-So-Super Committee

Those Automatic Defense Cuts Aren't Going to Happen

by WINSLOW T. WHEELER

 

Touted as the “Super Committee” by pundits, the Joint Deficit Reduction Committee-created by the August 2 Debt Deal between President Barack Obama and the congressional Republicans-has turned out to be not so super.  The real super committees of Congress, the appropriations committees, are reasserting their control, and they are doing it with the defense budget, keeping it quite flush with money and unraveling a second round of debt reduction. 

Painful as it is to remember, the August Debt Deal-which got the country past the crisis provoked by the Republican’s refusal to allow an increase in the debt ceiling-requires the so-called Super Committee to find at least $1.2 trillion in budget cuts over the next ten years.  If the 12 congressional Republicans and Democrats on the committee fail to agree on those cuts, automatic reductions are supposed to take place: including $492 billion in the defense budget and over $400 billion elsewhere, according to the Congressional Budget Office (at http://www.cbo.gov/doc.cfm?index=124140).  Either, the Super Committee will cut a deal, or the defense budget gets whacked. 

It is not going to happen that way.  

First, the Super Committee is bound to fail; it will reach no meaningful budget agreement. 

Second, when the committee fails, the defense cuts envisioned by the supposedly automatic trigger mechanism will not occur.  That will be for the simple reason that almost no one wants that to happen.  While they are quite mistaken about the consequences, almost everyone on Capitol Hill (and in the Pentagon) think that those defense reductions will be “devastating,” “disastrous,” “doomsday,” and any other Apocalyptic term you can think of.  In short, the Debt Deal took a hostage that no one wants to shoot.  

In the 31 years I worked on Capitol Hill, I came to know several others with as much, or more, experience as I in understanding how the place operates.  Not one of the Hill veterans I have heard from believes the Debt Deal and the Super Committee are headed for anything but failure.  The Deal and the Committee were designed only to kick the can down the road to get us past last summer’s crisis-with the inevitable result of provoking others. 

The meetings held thus far by the Super Committee have made obvious its inevitable breakdown.  Hearing this week with from the Director of the Congressional Budget Office, Douglas Elmendorf (who conducted himself with professionalism and grace), the congressional members demonstrated precisely why the vast majority of Americans hold them in contempt.    

The committee started out by insisting that it hear not from Elmendorf but from itself.  The national audience was dragged through more than an hour of supremely self-involved Republicans and Democrats explain how the other side caused everything and their own prescriptions were the only pill to take.  When Elmendorf tried to provide a framework for addressing the issues, they simply repeated themselves. 

Consisting mostly of second stringers on budget issues and leadership errand boys (and a female) from their party caucuses, that bunch will find a $1.2 trillion budget solution sometime after pigs fly and shrimps whistle.

Meanwhile, behind closed doors, the real budget action on Capitol Hill was occurring.  The Defense Subcommittee of the Senate Appropriations Committee met on Tuesday, in private, to decide on the 2012 Department of Defense Appropriations bill. It funds most, but not all, of the Pentagon’s budget.  The Subcommittee took cognizance of one of the provisions of the Debt Deal, but not any parts that had to do with the Supercommittee and the automatic cuts. 

In addition to the Super Committee and the trigger mechanism, the Debt Deal imposed-without any further palaver required-an initial phase of reductions on appropriations for the next ten years totaling over $900 billion.  While the precise budget obligation on the Pentagon in this first phase has not been entirely clear, most are now interpreting it to mean a $350 billion reduction.  In effect, that means that the Pentagon budget would be frozen at its current, fiscal year 2011 level-precisely the level set by the Appropriations Committee’s bill. 

It safely can be predicted this will be the level of Pentagon spending the entire Congress endorses for 20012, after theatrical grumbling by some Republicans about the bill’s spending being $26 billion less than Obama’s now meaningless budget request from last February.    

Even at the 2011 level, the bill is extremely generous.  The amount-about $529 billion after separate Military Construction and some other pieces are added-will be almost as much “base” spending that the Pentagon has seen in any single year for decades.  If you add the separate funding for the wars in Afghanistan and elsewhere ($118 billion), the amount is quite close to the Pentagon’s highest ever level since the end of World War Two-and it is well above previous secondary peaks attained in the Korean and Vietnamese Wars and Ronald Reagan’s fleeting zenith in 1985. 

That “frozen” 2011 level will be also more than twice the defense budgets of China, Russia, Iran, Syria, Cuba, and Somalia-combined.  It will be more than $80 billion more than we spent, on average, during the Cold War when we faced a threatening and heavily armed Soviet Union and a hostile, dogmatically communist China. 
 
While the new DOD appropriations bill was described by its architect, Senator Daniel Inouye (D-HI) as “not an easy allocation to meet” (committee press release is at http://appropriations.senate.gov/news.cfm?method=news.view&id=33ad4f56-b0fc-45f8-8c5b-162b5eab4791), it is actually a defense budget quite flush with money.

Moreover, the bill has several gimmicks to permit higher spending than is apparent.  It includes a clumsy ploy of moving $6.5 billion out of the capped part of the Pentagon budget that the Debt Deal limited and adding the money back into the separate (un-capped) funding for the war in Afghanistan.  (This, of course, permitted the “base” bill to contain $6.5 billion more than otherwise.)   Also, as the details trickle out next week, we will find the usual ruses, including cuts for “revised economic assumptions,” “unobligated balances” and other phony games to pretend the Committee is reducing money (rather than deferring it) and making good government decisions (rather than taking capricious cuts in military readiness while protecting procurement-and contractors). (For a previous discussion of some of these tricks, see http://www.cdi.org/friendlyversion/printversion.cfm?documentID=4673.) 

The bill is not a tough minded but moderate action to impose restraint on the Pentagon; it is an effort to protect Pentagon spending as much as possible.  With Robert Gates taking the lead and Leon Panetta bobble-heading in agreement, the Pentagon has resolved itself to that first phase of $350 billion in cuts over ten years.  They are not happy about it, but they will live with it in order to fend off further reductions.  The Senate Appropriations Committee leadership is in deep sympathy with that sentiment.  

Filled with bunkum to seem to be cutting at least moderately but actually rescuing unaffordable, underperforming flotsam like the F-35 Joint Strike Fighter, the bill from the Senate Appropriations Committee is a rear guard budget protection action.  

The gambit will be successful.  The defenders of big defense spending have been extremely vocal. The Chairman of the House Armed Services Committee, Congressman Buck McKeon (R-CA), is quoted almost every day about the cataclysm to occur if the defense budget is cut at all.  This kind of hysteria makes the assertions of Senator John Kyl (R-CO) almost seem to be the middle ground: he threatened to quit the Supercommittee if the DOD cuts go beyond the initial $350 billion. The response from Democrats and even Republicans who have previously favored more meaningful Pentagon cuts has sealed the deal: they have been completely silent. 

All that remains to be done is to let the Supercommittee proceed on its clear path to failure.  That will trigger the dreaded automatic cuts, but only nominally.  As designed, those cuts would not occur until 2013.  The big defense spender types will have all of 2012 to trash any opponents who dare to speak in favor of allowing them.  They will use their traditional slander that to be against bloat in the defense budget is to be “anti-defense.”  It has always worked in the past, especially with Democrats who want to posture themselves as moderate, such as candidate Obama. 

The Debt Deal will be rewritten; the defense budget will be “saved,” and the next budget crisis will be made both inevitable and worse. We have a lot more dysfunction in Congress and the White House yet to observe.