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The Strange Game Theory of the Sequester

• February 27, 2013 • 11:08 AM

The Obama administration wants the sequester to hurt immediately so the public will clamor for its reversal. But will this gambit work? Probably not.

Barring the biggest Washington miracle since Dolly Madison ferreted paintings out of a burning White House in 1812, sequestration—the automatic, across-the-board cuts to defense, discretionary and certain health programs totaling $85 billion in the 2013 fiscal year, and $1.176 trillion over the next decade—will take effect March 1. The Congressional Budget Office has estimated that these cuts will cost 750,000 jobs in 2013, and reduce gross domestic product for 2013 by up to 0.5%. The effects stand to be disastrous: that much is clear. But when it comes to the politics of the sequester—and the gamesmanship involved—very little is as it seems.

The White House has over the past month consistently given the impression that the president’s hands are tied, that the sequester—if not averted—will simply ripple through affected government agencies with no exceptions, and that the cuts will quickly hit hard in every state, with the administration powerless to stop the madness.

This isn’t quite true.

There are in fact measures that the president’s Office of Management and Budget could unilaterally take to at least mitigate the effects of the sequester in the near term. (More on this later.) But the agency is unlikely to take those measures. Why? Because making clear the impact of forced austerity may offer the best hope for discrediting and reversing it.

When faced with closures of national parks, shutdowns of government offices, delays in needed services like the disposition of federal benefits, and long lines at the airport due to a reduction in TSA personnel and air traffic controllers, the thinking goes, perhaps Congress will get moving on a less painful solution. “If they’re trying to put pressure on Congress, they’ll want the cuts to be felt pretty quickly,” says budget expert Stan Collender of Qorvis Communications.

So we have a cock-eyed scenario where the White House may well want to ramp up economy-strangling cuts quickly, in an inversion of the normal order. Unlike the Hippocratic oath, the watchword here is “first, do some harm.”

The question is, will it work? Can Obama—provided he decides not to hold the sequester’s pain at bay—make the pain come fast enough? Unfortunately for this plan, the picayune clockwork of government is likely to get in the way. A combination of complex budget rules, sequestration limits, and the ordinary instincts of agency heads may slow down the effects of the sequester and leave the public with the mistaken impression—for a crucial couple of months—that austerity doesn’t really bite.

 

THEORETICALLY, THE OFFICE OF MANAGEMENT AND BUDGET COULD prevent budget cuts from occurring in the immediate term by using something called apportionment power. OMB does not give federal agencies their entire budget to spend at the beginning of the fiscal year; instead, the office parcels budgets out in increments, typically monthly. Conceivably, OMB could maintain spending at the pre-sequester level through at least the month of March, and then kick in the reductions later in the fiscal year. “Just because the sequester happens March 1, doesn’t mean that OMB has to change apportionment,” Collender notes. “They could keep agency spending at a certain level in the hopes that this will be dealt with quickly.”

So why isn’t the administration likely to use this strategy to hold off the worst? Because nobody really expects a swift solution in Congress, just finger-pointing that could go on for months. And delaying the sequester apportionment would only lead to bigger relative cuts later in the year. That’s why Patrick Lester of the Center for Effective Government, who wrote a report last November including apportionment as a potential strategy for mitigating the effects of a temporary sequester, is less enthusiastic about that particular policy now. The fiscal cliff deal, which finally resolved the issue of the Bush-era tax cuts while delaying the sequester by two months, effectively split the sequester away from the most powerful spur for both sides to reach an accommodation. “Before, the responsible position would be to keep funding at normal levels, in the expectation that this would get retroactively fixed,” Lester said. “Now, if you delay cuts, the more severe they have to be at the back end. The responsible position has suddenly changed.”

So now the Obama Administration appears to want to shock the political system into action with a bout of rapid-onset austerity. But here’s why that’s unlikely to work: (Warning: the next seven paragraphs get kinda wonky.)

According to the OMB Federal Controller Danny Werfel, federal agency heads will have the job of actually applying the sequester’s across-the-board cuts—around 9% for the rest of the year for non-defense discretionary programs, 13% for defense, as well as a 2% cut to Medicare reimbursement rates for physicians and hospitals—to every eligible account in the federal budget. (Mandatory programs like Social Security and Medicaid are exempt, as well as some discretionary anti-poverty programs like welfare, and the Veterans Administration budget). No “program, project or activity,” to use the proper nomenclature, can be spared; even sub-accounts within agency budgets must get cut at the same rate. Some cuts will hit right away: the long-term unemployed will immediately see smaller benefits, as will recipients of nutrition assistance through the Women, Infants and Children program (WIC).

But overall, many sequester cuts will not take effect until well after March 1.

The rules governing furloughs for federal workers will cause perhaps the biggest delay. Since federal agencies cannot reduce pay for federal employees under the sequester, unpaid furloughs are really the only way to lower agencies’ personnel budgets—often their highest expenditure. And labor rules dictate that most federal employees must be given 30 days’ notice before they are put on furlough, with a 7-day appeal process. Many agencies have already announced that their workers will have to take one day off per two-week pay period for the rest of the year. But the notice and appeals process means that those furloughs won’t roll out for millions of federal workers until early April.

Aside from that, generally speaking, agency managers have a natural inclination to at least try to soften the impact on their offices in the short term. They may even hope against hope for a quick resolution, and try to run on fumes with stopgap measures for a few weeks. This, of course, runs completely contrary to the Administration’s strategy of heightening the pain from sequestration to raise pressure on Republicans—but it’s likely what agencies are gearing up to do.

For instance, many federal agencies have “carry-over” funds in their budgets, typically intended for capital investment, that they can use over a period of years. For non-defense budgets, these previously appropriated funds are not subject to sequestration, and can continue as scheduled. In particular, transportation spending for highway and mass transit should be safe from the cuts in the near term, though this year’s cuts will ripple into future years’ budgets (it’s actually for this reason that the $85 billion in sequestration cuts will actually amount to only $44 billion in the 2013 fiscal year, with the rest spread out in these multi-year funding streams). Agencies can also carry these “unobligated” funds from earlier in the fiscal year into later in the year. They can “reprogram” funds to a limited degree within a particular program, project or activity, without notifying Congressional appropriators. And they can focus on existing contracts and grants, which aren’t subject to the automatic cuts as long as they are already authorized and funded, before signing new ones.

In fact, there is some evidence that federal agencies have already slowed down spending in anticipation of the sequester, leaving them more money in their budgets for the remainder of the year. Though Congress holds the power of the purse, the original sequestration law actually urged program managers to “employ all other options available to them” to avoid personnel furloughs, and some agencies, like the Government Accountability Office, have already done so.

Finally, in the sensitive case of education, we already know that much of the hurt won’t arrive for a while. Budgets for five major programs, including Title I and II funding for school districts, are mostly advance-funded. While some education programs will see immediate cuts, Education Secretary Arne Duncan has already acknowledged that the major impact of sequestration won’t hit until the 2013-14 school year.

None of this is to say that the warnings of deep economic harm from sequestration are hot air. Even the Center for Effective Government report, which outlined all the ways in which sequestration could be mitigated, concluded that such measures would only last about a month before the program cuts and job losses revealed themselves.

The problem for the White House, despite outward projections of confidence, is that the sequester simply won’t spool out in spectacular fashion. The biggest near-term hits will be to areas largely invisible to the public, like scientific research or military readiness, or to low-income populations that have scarce political power. Events harming the broad mass of consumers, like airport chaos, mass teacher layoffs or shuttered national parks, won’t kick in for a month or more, whether the administration likes it or not. The President himself admitted this week that the impacts “will not all be felt on day one.”

Eventually, Collender predicts, the effects of the sequester will be catastrophic. But if the public doesn’t see those effects, and fails to engage with representatives in Congress, inertia could set in, and a looming March 27 deadline for a continuing resolution to fund the government could actually etch the sequester in stone by permanently keeping discretionary and defense spending at those reduced levels. The White House could try to engineer a forcing event, perhaps through the 30-day notices for furloughs. If the IRS stopped distributing tax refunds for lack of personnel to process the returns, maybe the public would take notice. “When Bill Marriott calls Republicans and says ‘Do you know what you’re doing to me, because of these FAA cuts nobody can get to my hotels,’ we’ll see what happens,” Collender contends. And he may be right. But if nothing major happens right away, and the public remains comfortable through the front end of the sequester’s automatic cuts, it may be too late when the real pain arrives. What’s more, it could shift the politics of budget cuts, giving credence to Republican claims that the White House has exaggerated the impact of lower federal spending, and making the case for more.

There’s no compelling economic reason for forced austerity at the moment, especially as it’s been so disastrous in virtually every country where it’s been tried since the Great Recession. The public doesn’t support big, dumb cuts of this stripe either. The proper move economically would be to cancel the sequester entirely, but it took until days before the deadline for anyone in Washington, in this case the Congressional Progressive Caucus, to propose that. And they’re quite lonely on this point. In the meantime, we have this massive exercise in game theory being played out, with hundreds of thousands if not millions of lives in the balance.

“In a rational world, they would just set a final funding level for 2013 on March 27 and cancel the sequester,” says Collender. “But to call this a rational process would give Washington too much credit.”

David Dayen

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