The Sequester Happens Today

3/01/2013 08:32:00 AM
Update: I have since realized that this post uses the wrong CBO figures for the sequester. The sequester cuts 85 billion in "budget authority" this year, which will probably amount to a spending reduction of roughly 45 billion. So, this is about twice the size of the figures originally mentioned below, but still not terribly devastating.
As you may know, the infamous budget sequester goes into effect unless a deal is made today. What is the sequester?

According to the CBO, the sequester amounts to roughly 20 billion in cuts to Federal spending every year for the rest of this decade.  This amounts to about 0.5 percent of all federal spending, and roughly 0.13 percent of GDP. A fairly conservative estimate of the spending multiplier right now would be in the 1.2 range meaning that the sequester will reduce growth by at least 0.15 percent per year for the rest of the decade.

So, all-in-all, the sequester is small enough that it won't be the end of the world. (Side note: this is why I think the press does a disservice by reporting 10-year deficit reduction figures. It makes it seem as if these deficit proposals are felling massive tree trunks when in reality they amount to little more than modest hedge trimming.)

We arrived at the sequester back in 2011 when the newly elected republican House members opted not to allow the government to repay its debt (which, by the way, the GOP had already approved in a series of continuing resolutions). To dissuade the tea party, republican and democratic leadership agreed to a "compromise" which consisted of raising the debt ceiling in exchange for kicking the can on budget reform to the "super-committee" which predictably failed to come up with any spending cuts, triggering a set of automatic spending cuts consisting of both across-the-board spending cuts as well as specific departmental cuts, such as deep cuts to the Department of Defense.

The logic of the sequester is that it would force intransigent congressmen to accept a deal they don't really want. I don't know why anyone thought that would work--we replaced the truly disastrous prospect of sovereign default with a far less disastrous prospect of spending cuts, and expected compromise to be more rather than less likely?

The situation has mostly only worsened since the failure of the super-committee. The debt ceiling wasn't enough to finance the spending congress approved, and when the issue came up again, the same tricksters refused to increase the debt ceiling. Instead, we got another "compromise" in which republicans agreed to temporarily suspend the debt ceiling and delay the sequester till march in exchange for making the Bush tax cuts permanent. That, of course, makes the deficit even worse, not better.

I think that the media has understated the significance of the fact that congress temporarily suspended rather than increased the debt ceiling. It means that we would need an even larger--and less politically palatable for conservatives--increase in the debt ceiling this time around. Moreover, the potential consequences of not raising the ceiling have been magnified--now not only would we be unable to spend in excess of revenues, but we'd actually have to cut spending even more in order to repay some 1.5 trillion worth of debt accumulated in the meantime.

But, the fact that this sequester isn't as large as the media seems to think shouldn't trick us into allowing it as acceptable policy. Across-the-board spending cuts are congress's favorite way to cut spending, because then they get to avoid naming any programs to cut. Unfortunately, that is by far the worst way to cut spending. Since congress isn't cutting specific programs, it isn't doing anything to reduce the workload of the federal bureaucracy. Something has to give, so we end up with two things: 1) a costly increase in the backlog of federal work orders (see, for example, the massive backlog of rape kits, due to similar spending sequesters in the past, that is currently letting rapists go free), and 2)large increases in future budgetary requests.

I think (1) is fairly self explanatory. Bureaucrats have exactly as much work to do under the sequester as they did before, except now they have to spend even more to maintain an inventory of unfinished work because they no longer have the manpower to do it on time.

(2) is the point that is often passed over. Each year we go through a new budget process, in which every agency catalogues all of the spending they need to do to accomplish their congressionally-mandated objectives. Those figures grow every year, which we would, to an extent, expect them to due to population growth and inflation. When congress imposes a sequester, agencies compensate by increasing their spending requests in the future. Usually, this is more than 1-for-1, since an idle project tends to compound costs as contractors need to be compensated for delays, among other things.

My point is this: if you want to cut defense spending, for example, there is a right way and a wrong way. The right way is to tell the army to stop servicing M1 Abrams tanks, or to tell the Navy to dry-dock the USS Nimitz. The wrong way is to tell the navy that it has to continue to use the USS Nimitz in active combat, doing all the same things it is currently doing, but magically spend 10 percent less while doing it. That approach inevitably increases spending, increases waste, increases inefficiency.

And if congress isn't in favor of mothballing any tanks or capital ships, nor in reducing the federal workload in any way, then I have to ask, why is it do they think spending is too high if they can't come up with a single item for which marginal cost exceeds marginal benefit?