Shooting Ourselves In The Foot: Breaking Down The Sequester

Barring a last-minute deal between President Barack Obama and Republican Congressional leaders, it appears that the sequester — $85.3 billion in spending cuts for this fiscal year (and a total of $1.2 trillion in cuts over the next decade) — will be implemented beginning March 1.

What will the sequester mean?  Let’s take a look.

Details of the cuts

$85.3 billion represents about 2.4% of total government spending.  But the impacts of the sequester will be far more impactful than that, because of the programs that are exempted from the spending cuts.  Additionally, five months of the federal fiscal year has already passed, meaning that the full year value of the cuts have to be taken in a seven-month timeframe.

Half of the spending cuts will come out defense.  $42.7 billion represents 7.8 percent of the defense budget on an annual basis, but compressing those cuts into seven months will result in a 13% cut in defense spending the rest of the year.  There are no significant exceptions to the defense spending cuts, meaning that essentially all items in the defense budget will get an across-the-board cut.  This includes operations in Afghanistan and military aid for Hurricane Sandy relief.  Additionally, President Obama has indicated he will protect soldiers from receiving pay cuts, which means all other programs will see yet larger cuts to make up the difference.  Finally, restrictions in the sequester language mean that the Administration is prohibited from cutting the pay of civilian defense employees and must instead reduce headcount.

The other half of the spending comes out of three categories:  domestic discretionary spending, domestic mandatory spending, and Medicare.  Together, these categories make up the remaining $42.7 billion.  Let’s talk about what is excluded from these three categories first — the list is long and includes Social Security, non-administrative expenses in the Veterans Administration, refundable tax credits (like the Earned Income Tax Credit), Children’s Health Insurance Program, standard unemployment benefits, Medicaid, and most other programs supporting low-income families.  These programs represent over $2 trillion in annual government spending, meaning that all of the cuts are being taken against spending that represents about 40% of the federal budget.

Domestic discretionary spending cuts will total $26.4 billion, representing a 5.2% cut on an annual basis and an 8% cut over the next seven months.  These cuts will hit areas of the budget including education funding for programs like Head Start, will require closing the air traffic control towers at several state airports, federal funding for “Meals on Wheels” programs, and grants for environmental projects.

Domestic mandatory spending will be cut by $5.1 billion, also representing a 5.2% cut on an annual basis and an 8% cut over the next seven months.  These cuts will impact farm subsidies, extended unemployment benefits, and some federal health care programs, such as the Indian Health Care program.

Finally, Medicare will see $11.2 billion in cuts, representing a 2% cut.  Medicare cuts will not impact beneficiaries of the program, but rather reflect a cut in provider and Medicare Advantage reimbursement rates.

What Will Happen?

The budget cuts in the sequester are really just about the worst kind of cuts that could be made.  First off, they are arbitrary and across-the-board.  The President has no discretion on how to distribute the cuts, meaning that effective programs are cut at the same rates as programs that have less impact.  Second, there are too many exceptions.  The cuts, as noted above, represent a small portion of the total budget, but since a majority of the budget is excluded from the cuts, the programs that are hit are hit hard.

These cuts are also going to have major negative impacts on employment and economic growth.  The Bipartisan Policy Center projects a loss of 1 million jobs and 0.5% of gross domestic product.  Other estimates claim job losses in excess of 700,000.  Implementing the sequester is going to seriously damage a still fragile recovery and sluggish labor markets.

Worst of all, the combined effect of all of these impacts mean that we are unlikely to get any meaningful deficit reduction as a result of the sequester.  Slower economic growth means that the economy will produce less tax revenue, making the deficit situation worse than before.  As evidence of how this is possible, one need only look at what is occurring in Europe.  Following rounds of budget cuts, the United Kingdom (which is on the verge of a triple-dip recession), France, and Spain have all missed their deficit reduction targets.  Fed chairman Ben Bernanke warned of the same possibility before the House Financial Services Committee today.

Additionally, the fact that health care and entitlement programs are essentially left off the chopping block means that these cuts do practically nothing to change the long-term debt picture, because that is where the majority of spending (and spending growth) will happen over the coming decades.

The upshot here is that the failure of our political system to take the right path regarding our financial future has us on the verge of a serious self-inflicted blow to our economy.  One might think that the risks here would be enough to get folks looking beyond their own narrow political interest.  But apparently not.  There’s a reasoned approach to be had here, maintaining levels of spending today to preserve the economic recovery while instituting reforms in the medium- to long-term in order to bring debt levels down to a sustainable level.  Who’s going to set aside their party’s political interests to protect the jobs of hundreds of thousands of Americans?

General Sources:

Bipartisan Policy Center (explainer)

Washington Post (state-by-state impacts)


13 Responses to “Shooting Ourselves In The Foot: Breaking Down The Sequester”

  1. There are more underlying concerns that are being impacted — our commitment to the future.

    First, let’s acknowledge that this is self-inflicted … August 2, 2011 Congress accepted its role of defining what long-term changes would be made to put the country on better economic footing. Correct me if I am wrong, but the bill was passed in the House with ZERO Democrat support … meaning that the GOP took responsibility. They had a number of options … they could have followed Simpson-Bowles which the House of Representatives put to a vote. It didn’t just fail. It got crushed. The final tally was 382-38. Twenty-two of the supporters were Democrats, while 16 were Republicans.

    Last May, the Sequester Replacement Reconciliation Act passed in the House 218-199 with 16 Republicans voting against it. Then in December, the Spending Reduction Act passed by an even slimmer margin, 215-209, with 21 Republicans opposed. No Democrat supported either bill.

    More than 30 Republican members who supported the bills are no longer serving in the House because of retirement, loss of election or running for another office. And in the 113th Congress, Republicans have eight fewer seats in the House.

    The House Republicans have lost control and have no plan for the future.

    Even when agreement is there, they have refused to act.
    For example, did you hear Mitt Romney, John Kline, Eric Canter, etc. cite that there were over 40 duplicative federal jobs training programs, so wouldn’t you think that they would have acted on that … especially when President Obama proposed reforming them to eliminate the duplication in his 2011 budget and when President Obama reminded Congress of the need to do this in the 2012 State of the Union address. Chairman Kline finally introduced a bill on March 29, 2012 … There was a subcommittee hearing on April 17 and eventually approved by the committee on December 5, 2012. The full House never voted on it. It’s a new year … Eric Cantor is pounding about the duplicative programs (without acknowledging that President Obama was pushing the same) … finally, Tuesday, the Education and Workforce held its first hearing on a new bill — and witnesses noted flaws in services for veterans. That’s right Chairman Kline is pushing a bill that will not help veterans. And Chairman Kline’s bill was introduced only after the Democrats had introduced there bill. Why the Republicans — especially Chairman Kline– did not accept President Obama’s proposed cuts in 2011 is stupefying … but then again, the House has not approved appropriations for the Departments Education and Labor budgets since 2011 (they have been funded through continuing resolutions).

    As Minnesotans know from the state shutdown … most of us will not be affected by the immediate actions (a physical therapist at the Walter Reed hospital has his hours reduced nor if the teacher at the DoD elementary base school is terminated) … and maybe if we fly, we might notice a longer delay in processing … but once the food processing companies cannot get inspectors in that will cause problems for them … as will the military industrial complex when DCAA inspectors are not available to sign-off on performance contracts. Businesses will see this long before the average citizen will.

    What we should be concerned about is the future. Erik Paulsen bemoans about the Medical Device Excise Tax (2.3% which is predominately being passed on to users just like every other excise tax) yet the sequester will have a greater impact on new drug and medical device approvals. The FDA’s Center for Drug Evaluation and Research (CDER) would face delays in translating new science and technology into regulatory policy and decision-making, resulting in delays in new drug approvals.
    IMO … not only will delays occur but employees will be terminated … it’s not just that employees will be cut, but that the employees who will be cut are the younger employees who have been studying the latest in medical research.

    These are cuts to America’s Future and I blame the House Republicans.

    • Oh for crying out loud. John Kerry promised nearly as much to the Syrians in additional aid. We spent more than this one he bank bailouts. If you are running an agency and can’t find enough efficiencies to cover this drop in the bucket, than yoou should lose your job. Tomorrow. You cannot tell me any department can’t find waste in their budgets to cover their measly reduction. It’s high time we learned the government has to be more efficient. And now they are going to be forced to ever so slightly efficient. families and businesses do this every day. It’s time to wake up and realize the the federal government is unsustainable as it spends today. It must be reined in one way or another. This isn’t glamorous, but it will work, with a tiny dent that will go unnoticed.

  2. “The good news is, the world doesn’t end March 2. The bad news is, the world doesn’t end March 2,” said Emily Holubowich, a Washington health-care lobbyist who leads a coalition of 3,000 nonprofit groups fighting the cuts. “The worst-case scenario for us is the sequester hits and nothing bad really happens. And Republicans say: See, that wasn’t so bad.”

    That’s the worst case sccenario? What a sorry state of affairs that someone would actually be so partisan as to say that a budget cut turns out to be unnoticeable is a worst case scenario. How will we ever get efficient government with this kind of attitude out there.

    Just like we saw here in our state alst session. Dayton says the GOP proposals are draconian. And look at us now that they have been implmented. 6 billion dollar deficit gone. And no one notices a reduction in services. And the state gnerates a surplus? Wow, what a disaster. A disaster for the left wing spendaholics, but that’s about it.

  3. Seems the stock market loves it! The White House, not so much. I flew back from AZ on the day the sequester hit. We found 6 TSA agents and 6 airport policemen standing around after the security gates doing nothing. One guy gave them a hard time and asked if it was shift change or a union meeting. The reply, something like that. Probably mandated to screw off to make the lines longer. I didn’t work. We found a short line to get through, despite the extra crowd for NASCAR and the spring baseball. Janet Nepalitano lied. People flied. HA HA…

    • Sky Harbor’s always a roll of the dice from a security perspective, in my experience. Either really quick or really slow.

      Napolitano didn’t lie, but the cutbacks aren’t going to have immediate impacts in most airports. Right now, it’s only airports with high percentages of international flights, as the Customs Service has eliminated overtime. For instance, JFK and Miami reported that waiting times at Customs were close to double normal on Saturday. As the furlough notices go out, we’ll be in a different position a month or two down the road, but it’s going to vary widely depending on where you’re at.

      • Perhaps they could reduce spending in another way rather than to introduce furloughs. Maybe cut back on uniform expenses, as the news today says they are getting new. Spend, spend, spend, but never a cut. Sad. Seriously, if furloughs are the only way the TSA can meet their measly “cut”, then someone needs to get the axe.

        • The problem is that the law was written to give no flexibility. The cuts occur at the program/project/activity level of the budget, and the law says that the percentage cut has to be equal. Here’s an example of how this works: A medical research effort would be a program. Each of the labs working on it would be set up as a project. Then, each of the high-level budget lines (labor, materials, etc.) would be set up as an activity. By law, they’re not allowed to spend less on materials to save labor. (Unless you favor the President violating the law and cutting the spending how he sees fit.)

          • That’s not what I’m reading about it. Managers do have some discretion even across PPA’s, and since we are currently operating under continuing resolution rather tahn a an actual budget, these affects are basically up in the air. Folks who claim to know exactly where the labor will be hit have mostly been wrong up to this point. This is a cut in the budget, which is set to grow. John Stossel even goes as far to say that this is a cut in increases, which really isn’t a cut at all. (Unless you are a politician or on a school board). Hence Big Sis being wrong about airport delays based upon this act. No delays were a resulting from this. So overtime is cut and you have to work the schedules more efficiently. Bummer. Sucks to be made efficient I guess.

            • There’s a significant part of the federal budget that isn’t budgeted all the way down to the Activity level. Managers, in that case, do have more discretion on how to make the cuts. But in areas where it is down to Activity level, the discretion is limited.

              • So let’s run with the TSA example. Did they get their annual increase this year under the continuing resolution, and was it greater than the sequester cut? And do they have the ability to manage thier budget, or is it all activity based, and they are forced to cut hours.

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