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Thursday, March 7, 2013

THE SEQUESTER BLAME GAME




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.

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