A lot of people have asked me this weekend about the sequestration: what it is, what it means, and what's going to happen.
First, what is sequestration? A lot of terms have been thrown around regarding the fiscal health and viability of our economy. The term sequestration may not seem to make sense, and in ways, it’s a misnomer. However, the sequestration is actually the mechanism by which the results are accomplished, not a mechanism of Congress but a mechanism of the Treasury.
Let's start from the beginning. Sequestration originated in the 1980's, during Ronald Reagan's Administration. With skyrocketing expenditures on the military, and a goal of cutting taxes for Americans, the deficits were growing exponentially. In order to reign in these deficits, and the debt that they were created, Congress passed the Balanced Budget and Emergency Deficit Control Act of 1985 otherwise known as the Gramm–Rudman–Hollings Act. It created automatic spending cuts if the deficits exceeded targeted levels. The way that spending was cut is that the Treasury sequestered, that is retained or refused to release, part of the funds budgeted to the different agencies. Thus, the term ‘sequester’. The GRH Act was found unconstitutional in Bowsher v. Synar a year later. The Act was reworked by Congress the following session, but it never really reduced deficits.
In 1990, the Budget Enforcement Act and the Omnibus Budget Reconciliation Act supplanted the reworked GRH Act. From 1990 until 2002, the government operated under a PAYGO system. This meant that any new expenditure had to be matched with cuts elsewhere or new revenue gained. In 2002, the PAYGO statute expired and in 2003 Congress passed President Bush's tax cuts. PAYGO was later reinstituted as a standing rule of the house, which doesn't have the force of law but is considered a suggestion to law makers. The PAYGO policy lasted less than a year. However, in 2010, PAYGO was signed back into law, making it mandatory again.
The new round of sequestration arises out of the Budget Battle in 2011. If you can remember back to the summer of 2011, the US government was approaching another cliff. We were running out of credit and the debt ceiling had to be raised or the US would start defaulting on necessary expenditures. The Republicans in Congress refused to raise the debt ceiling without drastic cuts in spending to help reduce the deficit. Specifically, the cuts they wanted were to come from domestic spending. The Democrats refused to make those cuts. The agreement that was struck had long term consequences. First, the debt ceiling was raised immediately. Incremental increases were also allowed, with Congressional approval. Some cuts were made immediately, but a Joint Committee would also be formed to create a plan for the remaining spending cuts. The sequester was included as a motivation to come to an agreement.
Then came December of 2012: the fiscal cliff. The Committee hadn't come up with an agreement and the time was coming. The sequester was on the horizon. A last minute deal, on New Year’s Eve, was struck. The Bush Tax cuts and some additional tax cuts were allowed to expire. The sequestration was put off until March 1, giving the Joint Committee additional time. That brings us to the present.
The Joint Committee failed. The President and Democrats refused to budge on their demands: Tax breaks only for those under $250,000 matched with reduced cuts on domestic spending and greater cuts elsewhere. The Republicans wanted tax breaks for everyone and greater cuts to domestic spending. Since no agreement was reached, on March 1st the sequestration, which was originally offered as a “nuclear option” to encourage agreement, went into effect.
So what is the sequester? The sequester is an across the board cut in spending programs. $1.2 trillion in cuts over 10 years. In reality, there will be cuts of about $984 billion- the remainder will come from debt interest savings. We divide that total by nine, the number of years it is in effect to come to a total of $109 billion a year. Now the fiscal year begins in September, so for 2013 there need to be $12 billion in cuts per month. Since the deal was made delaying the sequester until March- the cuts for fiscal 2013 will need to be about $85 billion dollars.
These cuts will come evenly from discretionary spending (for the most part, non-discretionary spending will not be cut). Half of the cuts will come from defense spending and half from domestic spending. Domestic spending is divided into Medicare and everything else. Medicare will see cuts of 2% across the board. This means that providers will bill as usual but will be reimbursed at .98 cents on the dollar.
All other agencies/budget accounts will be cut evenly. This is a very stupid way to make budget cuts. Everyone can agree that some budget accounts are more important than others. In lean times, such as these, cuts can be made to non-essential budget items and leave funds for others. To me, there are some things that should be considered essential: programs which provide food and health care to low-to-no income households and the elderly, first responders, and air traffic controllers for example. These cuts will be drastic and in effect until the new fiscal year in September, once we’ve reached a new budgeting year, Congress will be able to play with the numbers and make the cuts less drastic, while retaining “flat” cuts across all spending.
To give you an example: If you were part of a group experiencing a food shortage, you wouldn’t necessarily decide to cut the rations for everyone equally. Sure, that may be the “fair” thing to do, but you have to realize the relative importance of different members of the group. Those who are scavenging, foraging, or tending crops- things which bring in additional food- need energy to continue working. Some tasks can be left undone and those people can conserve energy and be given smaller rations. Those programs that do much needed work, the difference between survival and non-survival to some, need to have limited cuts while others can be cut more and not feel it in the same way.
The important thing to remember is the same thing I have always stressed, will stress on this blog, and is a major focus of my book: we have to keep in mind that in a modern society- EVERYTHING is interconnected. Let’s take one example: The Norfolk Shipyards. The men and women who work there are all civilian employees of the Department of Defense. They are part of the 800,000 workers who could get furlough notices. Their paychecks and family budgets are obviously affected, but it doesn’t end there. Since they are not working, the businesses around the shipyard, set up to serve the workers are going to suffer and some will close. Those folks, now out of work too, will buy less goods and services and other businesses in Norfolk will close. We have seen this before and the result is completely predictable.
The BRAC Commission (Base Realignment and Closure Commission) has spent the two decades since the end of the Cold War closing bases and moving units to consolidate and save money. If you were to go to towns that lost their military base 2 years ago, you will find a community on the brink. If you go to towns that lost their base 5, 10 or 15 years ago- you will find ghost towns; communities that are a shell of their former selves. When the base; and the men, women, and families who served there; left, everything in the town closed down. We are going to start seeing this all over the country as a result of the sequestration.
More broadly, we have an economy on the brink. True, based on economic principles, we are no longer in a recession. We’ve had positive, but slow, growth over the last few quarters. But our economy has not restabilized. We felt a shudder when the tax cuts expired at New Years. Most of you probably noticed less money in your checks in January than there was in December. Now, another $85 billion is going to be taken out of the economy. With reductions in programs for the no-to-low income level people, there will be even less money spent on non-essentials. Inevitably, this will mean more economic shrinkage and destabilization.
On 1 March, my facebook status said “Happy Fiscal Cliff/Sequestration Day! Here's to the end of America as we know it.” We are on the brink of losing our country, possibly for good. And for what? To force the pending tax cuts to be applied to everyone, even those who make over $250,000 a year and to force spending cuts on domestic programs.
But it’s not too late. The Sequestration can be “undone” if Congress can strike a deal at any time, but that doesn’t seem likely.
I’m linking to a video below about other effects of the Sequestration, and a comment from Speaker Boehner from when this deal was first struck back in 2011- that he got “98% of what he wanted. Apparently, this is what he, and the Republicans, really wanted.
Please comment below, and let me know what you think. Also, like/share on facebook and twitter. Look for more updates in the coming weeks. © Robert Cheek, 2013
No comments:
Post a Comment