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Friday, March 8, 2013

The Sequester

Economystified reader Kate W. asked me via facebook:
"Hey, I have a question. What is the Sequester and why is it happening?"
I'm sure plenty of people are wondering the same thing.  Here's the gist...

The ticking bomb

The scene appears in about a thousand corny action flicks.

Our hero has discovered a bomb in a park, in the lab, on this plane, merry-go-round, whatever.

The conveniently visible and accessible "count-down timer" (standard issue on all movie bombs) - shows less than 5 minutes remain until the cataclysmic explosion.  Oh God, there's not enough time to evacuate the blast zone!  We have to diffuse the bomb NOW!

BUT WAIT!  Suddenly, some one hollers from off camera!  The hero whips around, and we see...THE VILLAIN STANDING RIGHT BEFORE HIM!!!!

He's just delivered and armed the bomb, but he hasn't fled the scene yet.  He's hung around to taunt the hero.

Hero: "There you are!  I have you now!"
Villain: "No you don't Bond/McClane/MacGruber!!  I know you'll stay here and diffuse the bomb, giving me time to make my escape.  You won't be able to stand allowing all these people to die just to capture me!  I'll see you in the sequel!"

Well, the hero always stops the bomb (which, apparently, can be defused by just cutting wires).  He saves himself, the damsel, the innocent bystanders - and the reckless, mad villain gets away, just as he planned.

Anyway, we've all seen something like this.  And, apparently, the United States Congress has too.

The Budget Control Act of 2011

In August 2011, Congress ended the fiscal game of chicken hence dubbed "The Debt Ceiling Crisis" with the passing of the Budget Control Act.

The act created a handful of mechanisms and committees tasked with finding way of reigning in the Federal government's spending habits.  Honestly though, the act mostly was just a way of putting off substantial action for a later date.  It didn't really create any firm plans, it just made plans for how the plans would be made.

Anyhoo, one of the fiscal control mechanisms established in the BCA was the dreaded SEQUESTER. Its a financial time bomb, built by Republicans and Democrats together, used to threaten everybody into getting along.

The idea is as follows: both parties listed out a series of spending cuts they would NOT want to see under any circumstances.  Then they scheduled these unwanted cuts to actually go into effect automatically on March 1st, 2013.  Those cuts are the actual "Sequester."

Congress would then have from August 2011 to March 2013 to make some final, solid plans on a broader set of economic items - tax and permanent spending cuts stuff.  Congress was supposed to find more palatable cuts then the crude, scatter-shot, across the board ones to be triggered by the Sequester, and make those instead.

If an agreement was reached before March 1, the unwanted cuts of the Sequester were to be canceled.  But if all the issues were not address, the cuts that nobody wanted to see happen would happen.

In true Steve Segal Michael Bay Kurt Russell fashion, Congress built a bomb, and set the timer to countdown, with the intention of forcing themselves to try to cooperate long enough to defuse that bad boy.  Either make peace, or we all fall down.

So what ended up happening?

The bomb went off.

What's effected

Consensus on the selected issues was not reached.  A deal was not struck.  Tax reforms, austerity plans and financial planning was not revamped.

Instead, the cuts that no one wanted, the cuts everyone thought undesirable, the self-imposed negative consequences set to incentivise action, they are - by law - coming into effect.

Ok, so what are these cuts?  First off, most mandatory spending is unaffected.  From "The Sequester: Absolutely everything you could possibly need to know, in one FAQ" (Washington Post, 3/1/2013):

"Most mandatory programs, like Medicaid and Social Security, and in particular low-income programs like Temporary Assistance for Needy Families (TANF, or welfare) and the Supplemental Nutritional Assistance Program (SNAP, or food stamps) were exempt from the sequester. However some low-income programs, most notably aid for Women, Infants, and Children (WIC) and the Low Income Home Energy Assistance Program (LIHEAP), are subject to cuts."

What is getting cut?  About half the cuts are in defense/military.  The rest is ton of little cuts from pretty much everywhere else: Dept of Energy, Dept of Education, Dept of Justice, Dept of Interior, SEC, FDA, FEMA, NSF, NASA - the list goes on.

(For a complete list of the cuts involved in the Sequester, check out this nice little 400 DAMN PAGE PDF from the CBO.  The list starts on page 13.  Amounts in millions.)

How much will be cut

I've seen some claims in the news that the Sequester is a "$1.2 trillion" cut.  This is not really correct.

The Sequester plays out over 10 years.  It eliminates $1 trillion in spending from 2013 and 2024.  Only $85 billion in total spending will be cut in 2013.

Now, this cut in expenses will also allow the Fed govt to avoid having to do some borrowing, meaning $0.2 trillion in interest payments will be avoided.  That's not really a "cut" per se, but it is a "saving," right?  Its not $0.2 trillion unspent - its $0.2 trillion of additional expenses that will never happen.

Hence the "$1.2 trillion" number some are claiming.  But right now, the whole current hullabaloo is over $85 billion - the money being cut out of the Feds outlays of cash for 2013.

What's happened so far

Not much.  The spending reductions will play out over the year, they aren't all happening right away.

The big threat right now is "furloughs."  There's a ton of furlough threats going on right now among the employees of govt entities and departments whose budgets are on the chopping block.

Whats a furlough?  Basically, your employer tells you not to come to work for X number of days, and you don't get paid for them.

They're a double-whammy on employees, as they miss a paycheck or two, and have to dip into their savings to cover their expenses during the furlough.  They lose an expected check and have to spend more off of past ones.

Now, in the US, by law, you cannot furlough anyone without 30 days notice.  No mass furloughs have been announced yet, so even if they are announced tomorrow, the effects won't be felt until April or so.

The big picture

There is a question worth asking here.  Is all the excitement proportional to the damage the Sequester will actually do?

The Sequester nixes $85 billion (or $0.085 trillion) out of the Federal govt's spending plans.  Their planned spending for the year?  $1.5 trillion of discretionary spending, $3.8 trillion in total.

So the total value of the Sequester is worth only 6% of all the money that was eligible for sequestration (that is the "discretionary" spending), and only 2% of all the money the Federal govt planned to spend for the year.

Already people are questioning the doom and gloom rhetoric going around, saying the Sequester might ultimately be more of an annoyance than anything else.

So protect yourself against exposure to exaggeration!  Watch and read the news.  If you notice claims by a department or program that their budget is being cut by a billion or so, they're likely referring to the total value of the cuts to their budget over the 10 years the Sequester plays out over.

Remember, only $85 billion of spending is canceled this year, and hundreds of departments and programs are affected.  There's just not that much cut to go around.

In my opinion: at the end of the day the Sequester might not really be such a bad thing.  It forces an unpleasant - yet probably necessary - spending reduction.  No hemming and hawing.  And it allows both parties to blame the other for the cuts.  I seriously wonder if a cut like this would ever have been made if it wasn't for the Sequester rule.

Certainly, if the country is planning on getting its finances in order, more cuts of this size are coming.  It's a little scary to me that this much chagrin can be caused by a spending reduction that is pretty moderate in the grand scheme of things.

The negotiation by time bomb

Either way, I feel the Sequester is a strange way to do business.  The fact that Congress can only do what it needs to do under the threat of mutually assured destruction is probably not a great thing.

Remember the start of this post, where I mentioned the "movie count down to Armageddon" scenario?  My favorite variation on the theme comes from the movie Dr. Strangelove.

In it, a mix up in communications sends a lone US Air Force bomber on a mission to bomb a USSR nuclear outpost.  Unbeknownst to the American's, the USSR has designed a "Doomsday Machine," one which triggers every Soviet nuke simultaneously whenever one military facility is bombed.  The machine can't be switched off, and the explosions are enough to wipe out all life on Earth.

The US and USSR find themselves working together, desperately trying to stop the bomber, since if it accomplishes the mission, everyone on Earth will die.

This is quite a hoot: check out this scene, and image, if you will, that the Doomsday Machine the characters are talking about is the Sequester, not the mass-nuke striker.  It actually works out eerily well...


  1. I should make one clarification.

    I say in the post that $85 billion in spending is canceled by the Sequester this year. You might see elsewhere the figure given as $42 billion.

    It $42 billion in actual canceled dollar amounts for the year, and $43 billion in money that was to be earmarked. For example, the DoD was planning on making orders for a couple of aircraft this year. The aircraft would be ordered this year, but not delivered for 2 or 3, and not paid for until delivery.

    So while the spending would be earmarked in 2013, the Fed has until 2015 or 16 to come up with the money. It has to be set aside, but not yet paid. The value of these aircraft and other expenses that would be planned this year, but not realized until later are included in the $85 billion dollar figure.

  2. From my perspective, its important to consider how this plays out in science. Travel funds for federal employees have not been removed, so most scientists working for federal agencies will be unable to attended workshops, seminars or conferences related to their area. (That means some of these events have probably been cancelled.)

    NSF has announced it will approve 1000 fewer grants than last year, so it will go 7850 new grants to 6850. No word yet on how that will be distributed across different subject areas in NSF. I've been planning on proposing a grant this summer to EAR (Earth Sciences) division, which already has a small piece of the NSF pie. Thus my chances look even worse than they did before. Its unclear yet what the implications will be for the student support grants that NSF also gives out every year.