Sequestration 101: The Sky Is Not Falling

Listening to our top politician in Washington this week was reminiscent of Chicken Little’s apocalyptic warning, “The sky is falling.” In daily appearances the loss of 2.5% of the federal budget has been lamented, implying catastrophic consequences. “It’s not apocalyptic,” he said, but the implication clearly made that it’s close to it. “It’s just dumb. And it’s going to hurt. It’s going to hurt individual people and it’s going to hurt the economy over all,” he said.

The president elaborated, “Emergency responders like the ones who are here today — their ability to help communities respond to and recover from disasters will be degraded. Border Patrol agents will see their hours reduced. FBI agents will be furloughed. Federal prosecutors will have to close cases and let criminals go. Air traffic controllers and airport security will see cutbacks, which means more delays at airports across the country. Thousands of teachers and educators will be laid off. Hundreds of thousands of Americans will lose access to primary care and preventive care like flu vaccinations and cancer screenings.”

As if to not be outdone, California Representative Maxine Waters cried, “We don’t need to be having something like sequestration that’s going to cause these jobs losses, over 170 million jobs that could be lost.” Apparently she’s unaware that our entire civilian labor force is only 144 million jobs in America! But the hyperbole seems to work, at least for the president, as he continues to blame congress for a plan that the White House concocted.

The hyperbole is, however, a far cry from reality. The sequester, which is now in effect, is actually the budget authority figure, not a budget outlay. There’s an important difference. A budget authority provides through an appropriations bill, the authority to spend a certain number of dollars. A budget outlay is an actual payment made for government obligations. The Congressional Budget Office in their January update scored the $85 billion in sequestration “cuts” as an actual $44 billion outlay. Rather than representing a “cut” of 2.2% of the federal budget, it’s a reduction of about 1.25% of a $3.6 trillion budget. And to make matters worse, it’s not really a cut, as a reduction in spending, but just a cut in the rate of growth of federal spending. The remaining $41 billion is in future budget outlays, unless congress or the president tinker with the reduction further.

We have to remember, Washington doesn’t use zero-based budgeting, they use baseline budgeting. The baseline is an inclined trend-line of spending increases each year. Washington uses the current spending levels as the “baseline” for establishing future funding requirements. They then assume that future budgets will equal the current budget times the inflation rate times the population growth rate. So rather than “cutting” spending by $44 billion, the rate of growth for future spending is reduced by $44 billion the first year. And given Washington’s creative accounting techniques, the rate of spending will likely accelerate after the first year of sequestration cuts, in spite of the agreement hammered out with the Budget Control Act of 2011 where the White House created the sequestration idea.

And all of those threats that the president made earlier about who wouldn’t get paid, and what services would not be provided, are just that: empty threats. That is unless he decides that those are the areas to be cut, rather than Moroccan  pottery classes, an empty airport at Lake Murray State Park in Oklahoma, a robot squirrel funded through the National Science Foundation, or the Alabama Watermelon Queen Tour. Yes, those are actual federally funded projects. It’s clear what his priorities are, to punish those programs and people most deserving of funding in order to portray the “draconian” 1.2% cut in the growth of spending as nigh unto apocalyptic. After all, money is power, and the more the threat of deprived spending can be spun to hurt the deserving and needy, the more power one has.

The sequester will be evenly divided between military and discretionary spending. The military will be adversely affected by reduction or elimination of defense programs.

Financial markets and the financial gurus on Wall Street obviously were not unnerved by the prospect of a 1.2% cut in the growth of spending, as financial markets closed higher for the week. Weighing more heavily on the minds of market analysts is the looming threats to economic growth of such massive government debt.

The rest of the outlay reduction of $1.2 trillion triggered by the sequestration will be applied over the next ten years. But even with that reduction, the federal debt is projected by the Congressional Budget Office to be a staggering $26 trillion. Erskine Bowles, co-chair of the Simpson-Bowles Deficit Reduction Commission has calculated that service on the interest for that debt alone, if rates stay near record lows, will be $1 trillion by 2020!

The sequester is actually beneficial since it will slightly slow the growth of the deficit and our national debt. But even the modified baseline must drop sharply to avoid a collapse of the economy under the weight of our national debt.

AP award winning columnist Richard Larsen is President of Larsen Financial, a brokerage and financial planning firm in Pocatello, Idaho, and is a graduate of Idaho State University with a BA in Political Science and History and former member of the Idaho State Journal Editorial Board.  He can be reached at rlarsenen@cableone.net.