With a month to go it is looking increasingly likely that sequestration will happen. For the two or three of you who haven’t been paying attention, sequestration is the second part of the 2011 Budget Control Act passed by Congress and signed by President Obama. It requires cuts in discretionary spending of $1 trillion over the next decade (on top of $1 trillion imposed earlier) if no agreement is reached on an alternative way of meeting this target (other spending cuts or tax increases or both). Half the cuts will come from current and future defense budgets and half from all other discretionary spending accounts. The way the law is written, instead of allowing the government to reach the desired total savings gradually over the entire decade with the bulk of the savings coming later in the period, the cuts must all come up front in the first year. For the Pentagon this means taking $50 billion out of the budget this year.
Not only is this the worst possible way of reducing spending on something that in principal we all agree that government should be doing – national defense – but Washington’s political “gridlock” has all but ensured that the negative effects of sequestration on the military will be greatly magnified. Initially required to go into effect January 1, Congress and the White House agreed to delay implementation of sequestration by two months in order to have time to work out a deal. While this may seem sensible it creates one enormous difficulty: the first year reductions, $100 billion of which $50 billion comes out of defense, will have to be taken in the seven months remaining in the fiscal year. It also has to be taken equally from each budget line, meaning no program regardless of how important it is to national security gets spared. Assuming straight line spending by the Department of Defense (DoD) over the course of the entire fiscal year, the savings demanded by sequestration will have to be taken out of the remainder of the year’s available funds. The result is, in effect a doubling of the impact of sequestration, effectively imposing an average 20 percent cut on every program.
As if that were not bad enough, because the Democrat-controlled Senate was unwilling to pass a budget in an election year (actually for the last three years), DoD is operating under a Continuing Resolution (CR). That limits spending for Fiscal Year 2013 to the levels agreed to for last year’s budget. In addition, a CR severely limits the Pentagon’s ability to move funds between accounts or to initiate new programs. Moreover, the Pentagon cannot initiate procurement actions that are intended to save money, such as the planned multi-year procurement of nuclear attack submarines and V-22 Ospreys, the impact of the CR will be to increase overall future costs, possibly in excess of any savings that might have been achieved by holding down overall defense spending. The combination of a massive cut in planned expenditures as a consequence of sequestration on top of the CR and coupled with constraints on the Pentagon’s ability to sensibly manage its remaining funds is the worst possible way to implement a program for reducing spending.
If you think this is just a special pleading for a particular cabinet department or set of interests, why not try to implement the combination of a CR and sequestration in your own personal or family budget. Most of us have experienced periods of time in our life when money was tight and we had to cut back. That can be enough of a challenge. But think of it this way. Many of a typical individual or family’s expenditures are fixed when the New Year starts. We have mortgages, car payments, cell phone plans, insurance premiums, medical premiums, etc. Lots of us are able to use automatic bill paying systems because many of our expenditures are pre-determined in this way. There are also lots of day-to-day expenses we have for items such as transportation, food, electricity and the like that vary somewhat month-to-month but never go away. Finally, if we are lucky there is something left over for entertainment, saving for the new car and even the old 401K.
Now try to pay for all of this year’s expenses with last year’s paycheck. Remember the raise you got at the end of 2012 or the Christmas bonus? Well they were rescinded. This is similar to the effect of a year long CR. In addition, you can’t take money from your 401K contributions to pay for the higher heating bill because it has been an exceptionally cold winter. If you were going to buy the newer, more fuel efficient car to replace your aging gas guzzler that is always in the shop, think again. Now you will have to pay the higher gasoline price and repair bills with some of the money you had saved for the new car which means that even after the CR ends, you will have to wait an additional year before you will have the money for that newer car. Nor have the things you need to buy such as food, clothing and household products gotten any cheaper.
This would be tough enough but now add sequestration on top of the impact of a CR. You now have ten percent less going to each one of your bills. It might be easier if you could take the ten percent cut just from your discretionary spending on entertainment and travel but the law doesn’t allow you to. Oh yes, did I fail to tell you that you have to take the entire cut in just half a year. Even if you are prudent financially and a diligent saver it will be hard to come up with the equivalent of 20 percent of your income over half a year. You signed contracts and made commitments to pay mortgage companies, banks, credit card issuers and the like and you can’t renege on these commitments. Hopefully they won’t foreclose on your house or kick you out of your apartment, shut off the heat or send in the Repo Man. But you will see your insurance cancelled, the home security system go dead, your cell phone service terminated and that student loan you have been trying hard to pay off go into arrears. Oh and the maintenance contract you have on your furnace to keep the old system going will have to be cancelled too. Just cross your fingers the air blower doesn’t go down in the middle of a snow storm. If the car blows a seal there will be no money to have it repaired and you will have to take public transportation to work. Maybe you can move in with a relative, go back to living in your parent’s house or bunk with your adult kids. But the Pentagon cannot.
This is the situation confronting DoD. It has endless commitments, contractual, operational, political and strategic which it must attempt to fulfill whether it has sufficient funds or not. It can’t declare bankruptcy. The only way it can function is by doing less across the board. You might park your car in the garage rather than spend money to get it repaired. The military will park planes, ships and tanks. This means fewer ships, planes and soldiers available to protect American friends and interests abroad. It means a reduced effort to eliminate the last remnants of Al Qaeda. It means fewer flying hours and training activities for everyone with a resulting loss of skills. It won’t just be painful. It will be catastrophic.