The Sequestration Pivot
Sequestration is at hand. The infamous provision that Congress enacted as part of the Budget Control Act of 2011 so as to get the debt ceiling lifted and to force Democrats and Republicans to negotiate and make concessions failed to do its job, so across the board cuts will begin to be made.
Agencies and Departments will have some latitude on how to implement the reductions. The IRS has reported that it wont furlough its tax processors until after tax season, for instance. Other agencies are already preparing for the cuts. The cuts will not come all at once, but will have a cumulative effect of $85 billion in the current fiscal year. Furloughs wont happen right away either. That will start within the next 30-60 days.
Small businesses that have contracts with federal, state, and local agencies will be hit sooner than larger businesses because they don’t have the financial means to endure prolonged holds on business. It’s also likely to increase the unemployment rates that have struggled to come down since the recession (and despite the fact that Wall Street has surged in recent years to its pre recession highs and profits are booming).
But all eyes fall on Congress on what the next step is. Both sides have been posturing for weeks about the ramifications of the cuts and who is to blame even though it was the failure of Republicans to budge from a no-tax pledge that forced the issue.
The President is meeting with Congressional leaders today, but no deal or breakthrough is expected.
Democrats and Republicans are in a standoff over how to replace the cuts totaling $1.2 trillion over nine years, $85 billion of which would occur in the remaining seven months of this fiscal year. Republicans reject Democrats’ call for higher taxes on top earners to replace part of the spending reductions.
“Middle-class families can’t keep paying the price for dysfunction in Washington,” Obama said in a statement yesterday. The president has until 11:59 p.m. to issue the order officially putting the cuts into effect.
“How much more money do we want to steal from the American people to fund more government?” Boehner said at a news conference in Washington yesterday. “I’m for no more.”
The White House meeting follows the Senate’s rejection yesterday of a pair of partisan proposals to replace the spending reductions. No additional congressional action is planned before the start of the cuts, to be split between defense and non-defense spending.
Yesterday, a Senate GOP proposal failed to make the cut (losing 38-62); it would have ceded appropriations control that is constitutionally provided to Congress to the President. In other words, that plan would have blunted effects of the sequester to make it more palatable, not correcting the deficiencies in the sequester’s overreaching and unyielding impact.
The Democrat plan (S. 388), which failed by a 51-49 vote (60 required to pass), would have replaced some of the defense cuts with a tax hike on top earners. That plan had the President’s support.
But the rest of Congress has skipped town knowing that nothing is getting done this weekend.
Republicans have been simultaneously blaming the President for the sequester and claiming that the cuts wont be nearly as bad as Democrats claim (but that some cuts are too bad to be made - as in the Defense budget). Majority Leader Eric Cantor has repeatedly made the bogus claim that Republicans have had a sequester alternative for months but Democrats have failed to act. I have previously fisked that approach, but the fact is that the GOP doesn’t have a sequester alternative in hand in the 113th Congress and that the prior GOP plan would have eliminated funding for Obamacare programs to offset cuts.
Democrats have all but warned that the sky will fall and that the cuts will have dire consequences and blamed Republicans for the failure to produce a balanced plan to replace the sequester with a combination of tax changes and spending cuts.
The danger for Democrats is that the budget cuts wont have the dire impact that they claim it would have and that most Americans will get the level of services they are used to and that will inure a benefit to the GOP longstanding argument that government is simply too big and that serious cuts need to be made.
Both sides of the aisle in Congress have known that they couldn’t have made cuts in the levels and scope of those that are part of the sequester. It gives them a chance to hack away at the discretionary budget in a way that hasn’t been done before. In other words, there are some on Capitol Hill who are welcoming the sequester and embrace its outcome.
One dirty little secret about sequester: cap hill veterans of BOTH parties admit they’d never be able to cut this much if left on their own
So, we get to a pivot point. If the cuts truly are as bad as the President warns and the American people see the impact of these cuts, it will put additional pressure on the Republicans to acquiesce on their stubborn refusal to balance cuts with tax hikes or eliminating loopholes in the tax code. The Republican effort to blame the President for the cuts has largely failed according to the polls, and that dynamic hasn’t changed - and likely wont change.
However, if the cuts aren’t as bad as the President has warned, that might give Republicans a renewed effort to push for still more cuts - arguing that there is much more to cut and that the fat needs to be trimmed from the non-discretionary budget as well. Republicans might lose the argument on who would take credit for the cuts (seeing how they currently blame the President for the sequester in the first place - #Obamaquester). Yet, these same Republicans would have no problem using the cuts to their advantage in demanding more. They’ll crow to their supporters that they held the line on cuts and did what they set out to do without compromising on their no tax pledge to Grover Norquist.
Folks like Larry Kudlow are carrying the Republican argument, claiming that the cuts are pro-growth by claiming that the cuts are only blunting a rise in the annual budget (which can be dismissed by looking at the fact that the annual budget as a percentage of GDP has shrunk during the president’s first term in office and is projected to further decline against GDP and that the total spending is still expected to increase due to entitlements not governed by the sequester).
The experts who study these things do expect that the cuts will have a significant effect on the economy by reducing the expected growth over the next year, including the IMF. Sequester cuts will slow not only domestic growth from 2% to 1.5% for 2013, but global economic growth. After all, the sequester is austerity by another name. And, we’ve already seen how austerity has slammed the economies of places like Spain, Ireland, and Greece where austerity was imposed to bring debt levels down.