Why Sequestration May Be The Least Worst Case

WASHINGTON: A year ago, the automatic budget cuts known as sequestration looked like the nightmare scenario. Today, amidst deepening gridlock and the threat of the first federal default in US history, they’re starting to look like the lesser evil.

“The debt ceiling is clearly the priority,” said the city’s leading independent budget analyst, Todd Harrison of the Center for Strategic and Budgetary Assessments in a briefing for reporters this morning. (Click here for CSBA’s full report). Both Republicans and Democrats, Congress and the White House are aware of the stakes, he said, so “I’m optimistic they’ll be able to increase the debt ceiling and avoid the worst consequences, a government default. I’m not confident [about] sequestration.”

Given how far apart Republicans and Democrats are on how to avoid the sequester, Harrison said, both sides may well look at the automatic cuts and decide, “it’s probably better than any deal we could negotiate with the other side.”

Harrison spent much of his time running the numbers on terms of sequestration as revised by the last-minute deal passed New Year’s Day. The new legislation reduces the blow to the Defense Department from the original $62.8 billion cut — about 11.5 percent from every non-exempt account — to a more modest $48.1 billion — about 8.8 percent. Some of the difference is made up by increased tax revenue, some is simply pushed off to fiscal 2014, when the Defense budget will be about $4 billion lower than planned under the original sequester deal.

The revised estimate for the cost of sequestration is “plus or minus two billion dollars,” Harrison caveated, given how hard the muddled law is to interpret and given that some details won’t be known until the last minute, like how many billions of dollars appropriated by Congress have not been obligated on specific contracts by DoD. (Click here for the math in more detail).

But Congress can revise those details at will. Harrison’s key point was more fundamental: With every day that passes, it gets harder for Congress to figure out a deal, so some sort of sequester is increasingly likely — and while sequestration would be a stupidly self-inflicted wound, it’s still better than a federal default. If sequestration is shooting ourselves in the foot, a default is shooting ourselves in the head.

The government has faced shutdowns and even (relatively small) sequesters in the 1980s and 1990s, Harrison noted: “With a government default, we’re going into uncharted territory.”

The Treasury is currently shuffling funds and using other gimmicks so it can keep covering the federal government’s obligations, since it technically hit the debt ceiling — the maximum amount the US can borrow — on December 31st. Sometime in February or, at the latest, March, the Treasury will run out of wiggle room. At that point, without a deal to raise the debt limit, Uncle Sam starts bouncing checks.

So, pick and choose what you don’t want to pay. Social Security checks? Medicare reimbursements to doctors and hospitals? Salaries for civil servants and military servicemembers? Defense contractors’ bills for everything from fuel to ammunition to keeping the lights on in the Pentagon? Interest and principal on the federal debt itself? However you slice it, said Harrison, “the checks don’t show up for about 40 percent.”

“That is a major threat to our economy,” Harrison said. “It is also a threat to our national defense.”

The economic threat is obvious. In the short term, every payment the government defers is money someone was counting on, which means they can’t pay their bills in turn. In the long term, if creditors lose confidence in US government debt — and one major rating agency, Standard & Poor’s, already downgraded its AAA rating in disgust in 2011 — then interest rates go up for everyone.

The national security impact of a default is more indirect than that of sequestration cuts, but no less real. “Every major war the United States has ever fought has been financed at least in part by borrowing,” Harrison said. (Indeed, the ability to borrow money in wartime has been crucial to governments for centuries, with Great Britain’s ability to spend France into the ground one of the major causes of the French Revolution). “By going into a default and not being able to pay our obligations for the first time in history, we would put at risk the full faith and credit of the United States government,” said Harrison. “Not only would you increase our borrowing rates” — increasing interest on the federal debt and making the deficit worse — but in a future military conflict or natural disaster, he argued, “we might be able to borrow sufficient funds to get us through. I think that is a national security risk.”

Compared to a default, then, sequestration actually looks almost sane. “I don’t think this is the apocalypse,” Harrison said of a sequester. “I think it’s a mess, I think it forces a lot of really stupid decisions, I think it is very short-sighted, but it’s not the end of the world, we’ll survive if it happens.”

The bitter irony is this entire crisis is self-created: The debt limit, the sequester, and all they entail are simply the products of prior legislation passed by Congress and signed by the President, which the Congress and President can change — if they can just agree.

“All of this is artificially imposed, but it is the law,” said Harrison. “They could change any part of this any way they wanted… They make their own rules, [but] these are the rules they made.”

Harrison has calculated that the country could save just as much money much more rationally by cutting the Defense Department budget a mere 2.2 percent per year (in real terms, after inflation, which is currently minimal).

“You will achieve the same level of deficit reduction,” Harrison said. “That’s a much more rational approach. And then DoD can start doing things that require time to achieve savings…You can start to do smart things that by the end of the decade are really saving you money.”

In historical terms, “a 2.2% annual decline over a decade, that is actually pretty close to being in alignment with previous drawdowns like we saw at the end of the Cold war, the end of Vietnam,” Harrison went on. You’d still have to make painful cuts, but at least you could choose what to protect. “If you do it smartly and you’re actually willing to make hard strategic choices, you could at the end of this come out stronger,” Harrison said.

That’s just not the course we’re on.