Originally published in the New York Times
To hear Republicans spin it, the sequester is no big deal — a seemingly tiny 2.3 percent reduction in federal spending. Jack Welch, the former head of General Electric, argues that any C.E.O. who can’t cut 2.3 percent from his company’s expenses should be fired.
But the budget mess is far more complicated than that pat contention implies. For one thing, these new spending cuts would come on top of $1.7 trillion of spending reductions already set to take effect over a decade.
For another, the spending reductions mandated by the sequester legislation are confined to a group of programs representing less than half of the budget, as shown in chart 1.
Even within this select group, all programs are not alike. Medicare is slated to be trimmed by only 2 percent, while a 7.9 percent reduction will be imposed on the military. Nondefense discretionary spending – everything from education aid to research grants – will be reduced by 5.3 percent.
And chart 1 does not depict another important feature of the sequester: the lack of flexibility that the administration has in imposing these cuts, even within these three areas. Under the budget legislation, in agencies and programs that are not exempt, the cuts must occur indiscriminately, across the board.
Finally, the legislation requires that the cuts take effect immediately, rather than being phased in over a number of years, as would be appropriate in such a weak economy. Achieving this year’s cuts would be particularly challenging, because only seven months remain in the government’s fiscal year.
So with apologies to Mr. Welch, sequestration doesn’t give President Obama the flexibility to do what every other C.E.O. is able to do when cutting costs becomes a necessity.
(In fairness, I concede that these cuts are based on projected higher levels of spending, not today’s levels of spending. But inflation still exists, however low, so the cuts will reduce the actual level of services that the government can deliver.)
And while I recognize that Senate Republicans have floated the idea of giving Mr. Obama discretion over how to implement the cuts, I believe the President is right to reject the idea, partly because trying to cram these reductions into the seven months remaining in this fiscal year is bad policy and partly because any replacement for the sequester should include a component of revenues.
So far, conservatives have ruled out any additional new revenue, pointing to the $650 billion tax increase voted at the end of the year. Now it’s time to focus on spending, they say.
But that ignores the budget activity of the preceding two years – which was mostly about cutting nondefense discretionary spending. So disdaining new revenue means that spending reductions would end up as the overwhelming contributor to our budget deficit reduction effort, as shown in chart 2.
If sequestration remains in place, we will have taken $3.5 trillion out of the projected budget deficits of the coming decade. Less than 20 percent of that will have come from last year’s tax increase.
That most of the burden of deficit reduction will fall on only a portion of the government is extraordinarily worrisome. As the chart below shows, nondefense discretionary spending – which includes those key investment areas like education and infrastructure – constitutes only 14 percent of the federal budget but is being asked to bear 44 percent of the cuts. All told, the three rounds of cuts will reduce expenditures on these important items by 16 percent – a lot more than the phony 2.3 percent number that the Republicans tout.
Similarly, the Defense Department, which also represents 14 percent of the budget, will bear 38 percent of the cuts. Meanwhile, entitlements – Medicare, Medicaid and Social Security – face only a 4 percent reduction, even though they total nearly half of all federal spending.
No one can enjoy the prospect of making fundamental changes in these key social welfare programs. But at the same time, constructing a $3.5 trillion package of deficit reduction – still less than the roughly $4 trillion needed even to keep our debt ratio at its current elevated level – that so disproportionately inflicts its pain is policy making at its worst.
Medicare, Medicaid and Social Security are cornerstone programs — but so are these innocuous-sounding “nondefense discretionary” programs. They represent our investment in our future. In the early 1950s, government devoted about 1.2 percent of gross domestic product to infrastructure; by 2010, that amount had fallen to just 0.2 percent. Meanwhile, federal spending on research and development dropped from a high of nearly 2 percent in 1964 to 0.9 percent in 2009.
We need a balanced approach in which everything is on the table, including more revenues and entitlements. For example, Mr. Obama has proposed limiting the tax savings on deductions to 28 percent. The Republicans say they want to reform the tax code so the Obama proposal sounds like a good place to start.
On the other hand, the Obama administration also should acknowledge that Medicare is in serious need of reform. A typical American at retirement age today will have paid an average of $122,000 of premiums into the system and will receive $387,000 of benefits (after adjustment for inflation!).
That math doesn’t work. We shouldn’t turn Medicare into a voucher program — as some Republicans, like Paul Ryan, have urged — but we can and should consider ideas such as raising Medicare drug rebates to Medicaid levels, means-testing benefits and increasing co-pays to ensure that recipients don’t use more Medicare services than necessary.
And of course we should consider structural reforms to our health care system, such as tilting the compensation of doctors toward results, rather than quantity of services rendered.
All the blather about whose idea the sequester was or whether more golf would help the process is just a sideshow. The core question is whether our political leaders have the courage to compromise their absolutist positions and agree on a long-term balanced approach that ends budget making by crisis and removes the dark cloud of uncertainty that hovers over our economy.
