The Sequester: What's Going On?

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"President Obama has taken the middle class hostage in a thinly veiled bid to hike their taxes."   - Prof. Peter Morici.   Read More from Morici

The White House says automatic spending reductions set to kick in will be put off until as close to midnight Friday as possible.

The law, passed by Congress on Jan. 2 simply says that "on March 1, 2013, the president shall order a sequestration for fiscal year 2013." That's budget talk for an $85 billion reduction in defense and domestic spending between now and Oct. 1.

Obama can issue that order at any point in the day.  And White House press secretary Jay Carney says that means midnight, Friday - or as close to midnight as possible: 11:59 p.m. and 59 seconds.

Because, Carney says, Obama remains "ever hopeful."

See Also: Cong. Higgins's Cut List |  CBS's Jill Schlesinger  | Your Comments

Some Thoughts on Sequestration from Jill Schlesinger CBS Moneywatch.com   Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York Jill writes: "19 months after it was originally conceived, sequestration week has finally arrived! Unless a last-minute deal occurs , the government will implement the first phase of across-the-board spending cuts, which will amount to $85 billion in 2013.   My favorite news producer calls sequestration the U.S. version of European austerity. Of course, things haven’t worked out too well across the pond, where drastic eurozone budget cuts have slashed economic growth and caused unemployment to spike. Last week, the European Union said it expects that the 17-nation eurozone bloc is likely to contract by 0.3 percent this year amid 11 percent unemployment. It would be the second year in a row and the third year in the last five that the region has been in recession.   The results of European austerity should be a warning to those who think that sequestration wouldn’t be that big of a deal. The blunt cuts are likely to slow economic growth by 0.5 percent and cause job losses of 750,000. While sequestration is not likely to derail the economy enough to cause another recession, real people will suffer direct effects and many others will encounter indirect effects (note to travelers: airports are likely to be a mess in the aftermath of sequestration!)   It is either amusing or annoying to consider that when the sequester was conceived in August 2011 during the debt ceiling negotiations, it was thought to be a deterrent -- a plan so absurd and dangerous that it would force both sides to come to the table. Obviously there is nothing too absurd for politicians!   Meanwhile, sequestration has become accepted as a fait accompli among investors, who have built in the ensuing slowdown into their 2013 forecasts. The economy is expected to sputter along at about 2 percent annualized growth, which nearly matches the pace seen in the last two years. But it was not sequestration that caused the first signs of anxiety in markets last week.

 
Is The Sky Falling?  | Why Can't They Agree?

Bellowing and blame aside, what really would happen if, as expected, President Barack Obama and congressional lawmakers allow the nation to blow past the deadline?

Here's Some Sequester Questions & Answers
 

Q: What's the big overall picture?   A: A series of cuts to federal agencies that would lead to longer lines at the nation's borders, less money for teachers and more hassle at airport checkpoints. Virtually every dollar approved each year by Congress would be slashed by a uniform amount, which would mean at least temporary layoffs for hundreds of thousands of public and private-sector workers. Programs like Medicare and Social Security are exempt, but there is no question the slashing of other programs would slow the nation's fragile economic recovery.

Q: And the big numbers?   A: Under a 2011 law designed to avert exactly this type of inaction, March 1 means automatic cuts of $85 billion from a $3.6 trillion budget over the seven months spanning March-September. That would include cuts of 8 percent to the Pentagon and 5 percent to domestic agency operating budgets. More than 3.8 million Americans who have been jobless for six months or longer could see their unemployment benefits reduced by as much as 9.4 percent.

Q: Why is this happening, what's actually going to occur and who is likely to be most affected. First, how did we get here?   A: The seeds of the sequester were sown by a demand by House Speaker John Boehner, R-Ohio, that the 2011 debt limit increase be matched, dollar-for-dollar, by cuts in federal spending. After "grand bargain" talks between Boehner and Obama broke down, the White House came up with the sequester idea as a way to guarantee large enough deficit cuts to offset enough new borrowing to make sure Washington didn't have to revisit the debt limit until after the 2012 elections. The sequester threat was designed to be so harsh that it would drive the sides to compromise on an alternative.

It didn't work. House Republicans twice last year passed legislation to replace the cuts with larger savings drawn from programs like food stamps and federal employee pensions. Democrats controlling the Senate didn't offer an alternative and instead put their faith in postelection negotiations to avert the "fiscal cliff," which resulted in Obama claiming victory on his promise to raise taxes on the rich but only a two-month respite from the sequester. Now, Republicans say they won't give in to demands by Obama and the Democrats controlling the Senate for higher taxes as part of any solution.

Q: How quickly will the sequester's impact be felt? How will we notice it?  A: It depends. At first, the general public may not much notice the cuts. The sequester isn't a government shutdown; it's a government slowdown. Furloughs of federal workers - forced unpaid days off - generally won't start for a month due to notification requirements. Many government contracts would still be funded using money previously approved even as agencies slow down the awards of new contracts. But furloughs of workers like air traffic controllers, meat inspectors, FBI agents, the Border Patrol and park rangers will mean an inevitable deterioration of noticeable government services that could, for instance, force intermittent closures of meat packing plants and shorter operating hours at smaller airports.

Other impacts will be more subtle, like longer waits at security checkpoints at airports and along the Mexican border or for cargo inspections at ports. Cuts inside the Defense Department will be particularly acute, in part because military pay is exempt, which will force sharper cuts on the rest of the budget, particularly training and maintenance. Civilian Pentagon workers will face furloughs of 22 days through the end of September. Basically, if you work for the government or do business with it, you'll be hardest hit.

Q: Will it harm the economy?  A: Yes. The Congressional Budget Office estimates it will cost 750,000 jobs and lower economic growth by 0.6 percent. That's because the cuts drain demand from the economy and affect companies that do business with the government.

Q: How big are the cuts? Huge numbers?  A: Over a decade, the cuts total about $1 trillion, half from defense and half from domestic programs. There's an additional $200 billion or so in lower government interest payments. For this budget year, the Congressional Budget Office estimates the cuts are $42.7 billion from defense (8 percent) and $42.7 billion from domestic programs (5 percent). Because the cuts are backloaded into the last seven months of the budget year, they feel more like a 13 percent cut to the Pentagon and 9 percent cut to domestic agencies during that period. And these are real cuts from agency budgets that have been essentially frozen at last year's levels.

Q: Aren't a lot of programs exempt?  A: Yes. The majority of the federal budget is in fact walled off from the cuts. Social Security and veterans' programs are exempt, and cuts to Medicare are generally limited to a 2 percent, $10 billion reduction in payments to hospitals and doctors. Most programs that help the poor, like Medicaid, food stamps, subsidized school lunches, Pell Grants and supplemental security income payments are also exempt.

Q: How much discretion do the agency heads have on what to cut, and when?  A: Not much. The cuts are supposed to apply equally to every "program, project and activity." That means, for instance, that the Agriculture Department can't take money designated for Boll Weevil research and use it to pay meat inspectors. Some lawmakers want to give agency heads greater flexibility to shift money around, but the administration says that would be of only limited help. The White House has told agencies to avoid cuts presenting "risks to life, safety or health" and to minimize harm to crucial services.

Q: OK, say it's now March 2, and the sequester has gone into effect. Is there any way to undo or limit it before much of its effect is felt?    A: Sure, but it'll take an act of Congress and Obama's signature. So the best chance for averting the sequester's major consequences might be to let it take effect and see if there's a widespread backlash from business and the public that somehow provokes lawmakers and Obama to compromise. That's hardly guaranteed. One legislative option would be to turn to a separate effort to prevent a government shutdown on March 27 and use that bill to address the sequester or to give agencies flexibility in mitigating its effects.

Prof. Peter Morici Economist, University of Maryland  Morici is a recognized expert on economic policy and international economics. Prior to joining the University of Maryland, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals President Obama has taken the middle class hostage in a thinly veiled bid to hike their taxes.   Having refused to work with Congress to reduce spending by $1.2 over ten years, as he agreed when drafting the Budget Act of 2011, the President must now implement $85 billion in across-the-board cuts to defense and non-entitlement government spending.   House Republicans have offered ease burdens on the public-by increasing Administration flexibility in implementing those cuts in the continuing resolution to keep the government funded passed by March 27-but the President wants no part in that.   Instead, he campaigns across the country, painting the dire consequences sequestration will impose if new revenues are not raised, as he proposes, by limiting tax deductions benefiting the wealthy. That is a cynical ploy-Mr. Obama talks like President Truman but taxes like King George.   Taxes imposed at his insistence on January 1 eliminated 80 percent of the benefits of tax deductions-mortgage interest, state income taxes, local property levies, and the like-for wealthier households. Any substantial gains from further tightening deductions must come from similarly limiting their use by middle-class taxpayers.   Already, by hiking social security tax rates, the majority of $155 billion in additional revenue obtained on January 1 was extracted from the working poor and middle class families, and federal revenues share of GDP will now substantially exceed its average for the last 40 years.   And the President is unwilling to acknowledge the government is spending is flying out of control. Over the last five years, outlays are up $1 trillion-three times the amount required by inflation-and tax revenues are short because high rates and burdensome regulations are choking economic growth and jobs creation.   Instead, the President threatens furloughed meat inspectors, food shortages and streets without police. His cabinet secretaries threaten three hour waits at airport security, reduced embassy protection and border patrols, and the list goes on ....   Appropriation legislation does limit President's ability to allocate cuts among departments. However, even without additional legislation, he has considerable discretion in allocating the 10 percent spending cuts within departments, but the President has refused to entertain options that would limit the pain in his pursuit of higher taxes. For example, the Agriculture Department has one of the largest staffs of economists in the world-surely, safe food is more important than yet another dull research paper. Military bands could stand down to maintain Marine guards at embassies.   Repeatedly, the President has exclaimed if Congressional Republicans don't cooperate, spending cuts now could derail the hard won recovery. It puzzles why he believes $85 billion in spending cuts could make such a difference, when avoiding those cuts through higher taxes would not.   Whether a second recession occurs is already baked in the cake. Mr. Obama's $150 billion January tax hikes, and similar rate increases imposed by Democratic governors from Maryland to California, have forced consumers to trim purchases. Retailers and wholesalers are reporting weaker traffic and are trimming inventories, and corporate leaders have announced plans to cut new investments and hiring owing to weak demand and more burdensome health care costs and regulations. When Americans can't get hamburger at the supermarket and unemployment rises this spring, the President will blame on Republicans for permitting sequestration, but it is the American people that bear the burden of his inflexibility, disregard for the facts and neglect in undertaking the responsibilities of his office