As it stands, the automatic budget cuts known as sequestration triggered by the demise of the so-called congressional ‘super committee’ pose a damned-if-they-do damned-if-they-don’t scenario.
If the vast across-the-board cuts to domestic spending and a huge scaling back of the defense budget designed to cut $1.2 trillion from the deficit over the next decade are abandoned or watered down beyond recognition before their scheduled implementation in 2013, the U.S. faces two immediate risks.
First, the U.S. risks losing further credibility in the eyes of the international community. A series of fiscal and political debacles, notably the prolonged and divisive debate over raising the U.S. debt ceiling last summer (which led to the creation of the supercommittee) and then the abject failure of that committee, have hurt the U.S.’ standing among other global economic powers.
Luckily, perhaps, for Congress and the Obama administration, the fecklessness of European leaders in dealing with the long-running euro zone debt crisis has diverted attention away from the inability of the U.S. to get its fiscal house in order.
Second, should the U.S. punt on another opportunity to trim its escalating deficit, likely via some compromise of higher taxes and reduced government spending, it risks another downgrade of its credit rating by one or more of the major ratings firms.
Prior to lowering the U.S. credit rating in August, ratings firm Standard & Poor’s warned of such a move if Congress and the administration failed to cobble together a viable, long-term solution. That didn’t happen and the U.S. lost its AAA rating in a historic move that shook global markets for weeks.
S&P issued a statement last month after the supercommittee acknowledged its failure: “The Fiscal Committee’s inability to agree on fiscal measures that would stabilize U.S. government debt as a share of GDP is consistent with our Aug. 5 decision to lower our rating to ‘AA+’. However, we expect the caps on discretionary spending as laid out in the Budget Control Act of 2011 to remain in force. If these limits are eased, downward pressure on the ratings could build.”
Congress and the White can’t say they haven’t been warned.
On the other hand, what happens if the spending cuts are implemented as outlined in the act, forcing the removal over the next 10 years of $492 billion from domestic programs and another $492 billion from the defense budget? (The $1.2 trillion in required cuts includes $216 billion in assumed debt service savings.)
Predictions of widespread layoffs of government employees are raising fears that the stubbornly high unemployment rate could go even higher in the next few years as tens of thousands of federal workers are shed from government payrolls.
“As it’s designed currently it would create a very destructive level of havoc across the government,” said Scott Lilly, a former senior congressional staffer and now a senior fellow at the Center for American Progress.
While most entitlement programs such as Social Security, veterans’ benefits and Medicaid for the poor are exempt from sequestration, as are spending related to ongoing military conflicts in Iran and Afghanistan, some popular programs are facing the budget knife.
Medicare, the government health care program for the elderly, is facing a 2% cut, which translates into $92 billion over the next decade. Education programs are also vulnerable. The National Education Association, a big labor organization that represents 3.2 million public school employees, citing statistics from the Congressional Budget Office, said sequestration will lead to $3.54 billion in cuts to education programs in 2013, cuts that would negatively impact more than 2 million students.
Meanwhile, Defense Secretary Leon Panetta predicted dire consequences for the U.S. military if sequestration is followed to the letter.
Lilly agrees with Panetta. Slashing $54.7 billion from the defense department’s 2013 budget would require the Pentagon to cancel any number of already-awarded contracts for all manner of ships, planes and weaponry. Many of these contracts have cancellation clauses, Lilly noted, meaning the contractor gets paid whether the product is delivered or not, which means the Pentagon saves nothing.
“You can’t take that kind of money out of ongoing complex systems and really have savings. You create a lot of chaos,” he said.
The cuts would also have unintended adverse consequences across a range of government agencies, according to Lilly, consequences that would spill over into the broader U.S. economy.
For example, consider the Department of Agriculture’s Food Safety and Inspection Service, a $1 billion program that employs about 10,000 inspectors. Proposed mandated cuts could eliminate about 1,800 of those inspectors, which could raise the likelihood of tainted meat or some other bad food product getting shipped overseas, a scenario that could have dramatic repercussions on U.S. food producers.
Trimming an already-thin workforce at the U.S. patent office could also have a detrimental impact on the economy, Lilly speculated. Entrepreneurs often complain about the lag-time for getting patents approved. It would only get longer if the staff was cut. And patents lead to innovation which leads to jobs.
“You’ve got to come up with some credible plan to reduce deficits that doesn’t cripple the economy,” Lilly said. “There are things Congress can do to close the deficit down that are a hell of a lot less destructive than letting sequestration go forward.”
Steve Bell, a senior director at the Bipartisan Policy Center, is similarly concerned.
“To take $100 billion a year out of the economy, mostly in jobs -- that is going to seriously harm the American economy,” he said.
But Bell said he understands the conundrum facing most members of Congress, whose inability to craft a workable solution to fix the nation’s fiscal woes merely reflects the mixed messages they receive from their constituents.
Most Americans, Bell noted, hate paying higher taxes. But they want more and better government services and believe other peoples’ taxes should be raised to pay for them. The vast majority of Americans also believe their government-funded entitlements are justified, Bell added. But they’re skeptical about other forms of entitlement and wouldn’t mind seeing those programs cut.