In October, 2010 the British government instituted
cuts to spending and met significant resistance from the public and
organized labor. Over the next two
years, Spain, Italy and Greece followed suit with similar results. After decades of increases in public spending
without regard to the lack of commensurate increases in public revenues,
reality finally made its claim on politics and reluctant governments, faced
with rapidly rising borrowing costs due to the weakness of their currencies,
had no other choice. The cuts were
painful, as all surgery is, but the pain of ignoring the problem with its
attendant high inflation rates, low consumption and job loss would have been
much worse and the leadership in these nations showed political courage in
addressing the problem.
The budget “sequester”, a mandatory across the
board schedule of cuts to U.S. federal spending went into effect on March 1 and
like the reductions in government spending in Western Europe, will cause discomfort, even economic pain, for
a broad segment of the American population.
President Obama has abandoned attempts at leadership and is traveling around the country warning workers in a
whole host of government and private business occupations that their agencies
and workforces will face downsizing.
Pell Grants, air travel, pre-school programs, environmental programs,
Food and Drug supervision, even Capital janitors, etc. etc. etc. and of course
“national security” are all “in danger” and “ it’s the Republicans fault.”
Essentially, Obama is telling the American people
that spending cannot and should not be cut.
He remains focused on raising taxes on “the rich” as a prescription for
dealing with deficits while paying lip service to “targeted “ spending cuts,
but he has offered few specific targets and is trying to gain political
advantage by demonizing House Republicans for rejecting tax increases in
negotiations to restructure the sequester.
But the sequester is not about taxes.
It is all about spending cuts and the U.S. spending problem dwarfs the
problems in Europe. Comprehensive tax
reform should also be a priority but as separate legislation, not as piecemeal
amendments to spending bills.
The “sequester” was of course, never intended to
become policy. In June, 2011 during the
gridlock over raising the national debt limit, Republicans demanded spending
cuts. A compromise was reached and the
debt limit extended. The compromise
included the creation of a Congressional “super committee”, formally, the Joint Committee on Deficit
Reduction, which was armed with the findings of the President’s own
Simpson/Bowles deficit reduction
commission of December, 2010, and was charged with making specific recommendations on reducing the deficit to Congress to reduce spending. To provide an incentive for the super
committee and the Congress to act, the sequester was passed which would require
“across the board” cuts in government spending in the amount of $1.2
trillion over a nine year period (2013-2021)
if they failed to do so. The logic was
that a super committee made up of members of Congress from both parties would
act with foresight, integrity and political courage and recommend meaningful
cuts to specific programs based on their relative importance. The logic was correct, but the super
committee did not contain enough such individuals and it reported its failure
due to partisan gridlock in November, 2011.
No recommendations were made, the Congress failed to act and the
“sequester” of automatic spending cuts loomed and became reality on March 1,
2013.
This fiscal year’s cuts total $85 billion which of
course is a large number in absolute terms.
But in relative terms it dwindles in importance relative to the problem
it is supposed to correct. The actual
2012 federal budget deficit was $1.089 “trillion”. Thus if 2013 spending and revenues remain the
same the sequester cuts will reduce the deficit by only 7.8% percent.
The remaining deficit will increase the federal debt by $1.04 trillion,
to over $17.656 trillion.
Obama claims to have offered a “serious” deficit
cuts program but the Republicans have ignored it. The “plan” however is a “smoke and mirrors”
political statement issued in the hopes that no one would examine it and the
alleged savings included would simply be reported as a credible budget
effort. Here are some of the alleged
“specific” cuts included.
In the area of heath care Obama would; “Reduce payments to drug companies.” He
doesn’t say how or which ones but he claims the savings will be $140 billion. He would also reduce payments to hospitals by
$30 billion but again fails to specify the criteria or mechanism for such
reductions.
Next in his exploitation of generalities is a
proposal to eliminate “certain
subsidies” for agriculture. This is
supposedly worth $30 billion. How that
could by calculated without identifying specific subsidies doesn’t seem to
matter. The “plan” gets more
preposterous however. In a first for a
budget item, he assigns a $50 billion reduction in government health care costs
by simply “encouraging efficient care after hospital stays.” The formula for
turning encouragement into actual savings would be interesting to see but is
not provided. However “encouragement “
gets quantified again in his next item:
“Encourage beneficiaries to seek
high value care” and “ask the most fortunate to pay more”. How many “encouraged beneficiaries” and what
the definition of high value care is in terms of actual cost isn’t provided but
it is supposed to add up to $35 billion in savings to the government. And if patients ignore the encouragement and
avoid cheap care for quality care?
That’s not considered. His next
spending cut proposal?, “Other health savings”, $120 billion. Spending cuts were never so easy.
Of course if“encouragement” doesn’t work then there
is always the equally vague “reform” strategy.
He would save $50 billion simply by “reforming” Transportation
Security Administration (TSA) and Postal Service regulations. How, and why this would save $50 billion is
not explained.
Additional “other savings” from fees on wireless
service providers, sales of “excess property”, and “program integrity” are
listed at $45 billion.
Obama’s plan was clearly crafted as a talking point by
political advisers who were careful not to include any specific cuts that might
offend Democrat voting constituencies or liberal pundits and as such is no plan
at all.
Thus, essentially the problem created by the
sequester is two fold; first, Obama and
the Democrats in Congress do not want to cut spending, it goes against their
ideology. House Minority Leader Nancy
Pelosi made it abundantly clear when she declared that “We don’t have a
spending problem. We have a deficit
problem.” , meaning that she believes the deficit is the result of a lack of
revenues i.e. taxes.
The other side of the sequester problem is that it
is a blunt force tool when a scalpel is required. Across the board cuts are imposed by
politicians who, like Obama want to avoid angering specific groups. But every government expenditure has a vocal
constituency which will claim that it’s funding, no matter how trivial ,
gratuitous, or non-essential, is vital.
Reality requires that government spending be reduced. Many government programs are beneficial but
not vital. In a time of austerity brought on by profligate, voter appealing
spending, hard choices must be made. This requires political courage and
executive leadership, both of which are sadly lacking.
Common sense tells us that agencies like the FBI,
the Coast Guard, and the FAA should not be cut by the same percentage as
government subsidies to so called “green industries” which by definition are
not technologically advanced enough or have enough customer appeal to be self
supporting. Nor should they be cut by
the same percentage as nice but uncritical grants to cultural organizations,
price supports to sugar beets and peanuts, military recruiting enhancements in
times of downsizing, or foreign aid to less important nations or those who consistently
prove unreliable allies. There are
abundant places to cut spending without reducing vital services to U.S.
citizens.
The Defense Department is being particularly hard
hit as they have absorbed roughly half of the sequester cuts. Ship deployments and flight hours are being
cut but could be restored by significantly reducing the number of bases and personnel in Germany
and England which are largely Cold War
hold overs with little strategic justification.
Eventually
the tougher political problem is that of entitlements which the reality of
demographics make unsupportable under their current rules. Social Security, Medicare and Medicaid are
exempt from the sequester cuts but are the largest drivers of federal
deficits. Adjustments will have to be
made and it is up to the executive branch to explain that the viability of
these programs depends on their modification for future beneficiaries. That seems far fetched given this
administration’s reluctance to cut or modify any social program.
The Republicans in the House will have to be ready
to make some compromises given the Democrats control of the Senate and the
White House but should do so only in return for specific cuts in spending. But since Obama will continue to rely on
“encouragement”, “reform”, and demagogic “sky is falling” political tactics, progress will only come if they make a serious
effort to identify and prioritize the necessary cuts and then demand similar
specificity by Obama as his alternatives during negotiations.
The “sequester” is ill conceived but is not the
crisis inducing program that Obama is trying to scare the public with, and it
is not beyond repair. It is legislation
that can be modified by further legislation which should be passed after being
carefully crafted. However the
ideological war and entrenched partisanship that currently substitutes for
serious statecraft in Washington makes the prospects highly uncertain.