I don’t think I am alone in being confused about what the imminent sequestration really means. Must air traffic controllers be furloughed or not? Must food inspections be cut? Must national parks be shut down? There are countless tirades both for and against what Congress and/or the President has done or not done, but precious little in the way of facts. So, I set out to find out what the facts are.
It was not easy. But I did found some clarification about what the Budget Control Act of 2013 really requires, and the truth does not paint a pretty picture of any of the sides of the debate. You can find the text of the bill here: http://thomas.loc.gov/cgi-bin/query/D?c112:5:./temp/~c112mdwHIH. If you look through the Act (go to Sec. 251) you will see it refers to across-the-board cuts to each “budget account” (there are some exceptions, such as Social Security). The Act does not define “budget account” but it appears that the idea goes back to The Balanced Budget and Emergency Deficit Control Act of 1985. That Act was more specific and speaks of cuts affecting every appropriation and budget account with each “category.” To see what this actually means, try the Office of Budget and Management report of exactly how the across-the-board cuts affect each budget account of the Federal government: http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/stareport.pdf.
This 400 page report is quite specific. For example, it shows an 8.2% reduction for Salaries and Expenses for Grain Inspection, Packers and Stockyards Administration (account # 005-37-2400). It also shows an 8.2% reduction in Operations of the Federal Aviation Administration (account #021-12-1301). And so on. So, the cuts do circumscribe how the government is to limit the budget – that was the intent of the 2011 Act. It was to be a “poison pill” designed to be so bitter as to incent both parties to negotiate in order to avoid draconian outcomes. No room was left for Congress or the President to prioritize government programs.
On the other hand, considerable discretion remains for each agency to decide how to implement these reductions. For example, if an agency needs to cut 8.2% of its payroll, it could reduce everybody’s hours of work (furloughs), reduce everybody’s wages (no cut in hours, just in pay – then it remains to be seen how many employees choose to find other jobs and how many continue to work, albeit at lower pay), or cut some wages and/or jobs and not others.
From this understanding I am willing to venture a few conclusions:
- 1. Regarding the macroeconomic effects of sequestration, there is a prevalent opinion among economists that the cuts will reduce economic growth in the short run (on the order of around 1/3 to ¼ of the expected growth rate – although there is not a consensus that even this will occur). This is based on most standard economic theories that, in the presence of unemployed resources, less aggregate demand will lead to less economic activity. Over a longer time period there is nothing resembling a prevalent opinion among economists – the predictions range from no effect to instigating another recession.
- 2. For more disaggregated effects (what will be the impact on the safety of our food, on air travel delays, on national park hours, etc.?), it depends on how the reductions are implemented. It seems to me that everybody’s position is posturing. Government administrators do not appear to be making real attempts to preserve their functions in the face of budget cuts – they are much more willing to cut hours of work than wages (after all, the latter will impact them as well and may be hard to reverse later on). Budget hawks seem to believe that 8% can be cut from a budget without any real impact on services provided.
- 3. The truth must be somewhere in between. As with most of American politics, there is no room for a moderate or reasoned view. It has become all rhetoric. Unfortunately, the press has also bought into the game – they would rather report on the battle as if it were a sporting event where someone will win and someone must lose. In reality, we all lose when nobody really has the incentive to spend the public’s money wisely, or even to tell the public what is fact and what is fiction.
In my view, nobody comes out looking good in this “debate.” It is a failure of our political system, a failure of the press, and a failure in the American electorate that has led us to the current situation. In microcosm, the debate over Anchorage school funding does not seem much different to me – posturing, rhetoric, irresponsible decision making by both legislators and school administrators – with a public and press not willing to ask hard questions or collect real facts. Why should we expect better outcomes under such circumstances?
Professor of Economics
Director, MBA program and Chair, Business Administration Department