Sequestration Is a Swiftly Ticking Time Bomb

Mandatory Budget Cuts Slated for Next Year Will Damage Our Economy Even Before They Are Implemented

Scott Lilly explains why the $109 billion in automatic, across-the-board budget cuts scheduled for January are already eroding the prospects of economic recovery.

An air traffic controller works in a terminal radar approach control room at the Atlanta TRACON in Peachtree City, Georgia. Sequestration would cut about $1.5 billion from the Federal Aviation Administration budget, including possibly more than $900 million from the salaries of air traffic controllers. That would require a 10 percent to 12 percent cut in hours worked by controllers, forcing a reduction in takeoffs and landings. (AP/David Goldman)
An air traffic controller works in a terminal radar approach control room at the Atlanta TRACON in Peachtree City, Georgia. Sequestration would cut about $1.5 billion from the Federal Aviation Administration budget, including possibly more than $900 million from the salaries of air traffic controllers. That would require a 10 percent to 12 percent cut in hours worked by controllers, forcing a reduction in takeoffs and landings. (AP/David Goldman)

See also: How Sequestration Would Work by Scott Lilly

As The New York Times documented in considerable detail this spring, the debt ceiling deal reached last summer wasn’t the deal the White House wanted. It wasn’t even the deal that Speaker of the House John Boehner (R-OH) wanted. Tea Party domination of the House Republican Conference left the two leaders with only bad choices. Either the U.S. government was going to default on its debt or a Rube Goldberg set of procedures aimed at forcing future compromise had to be included in the package. Rube Goldberg was the default choice.

Ultimately these agreed-upon procedures will result in massive, across-the-board budget cuts to nearly all government discretionary programs by January 2, 2013, if there is no compromise. While sequestration—the term applied to these cuts—was the lesser of two evils, Congress is still in the beginning stages of discovering how truly horrific the alternative will be. Last Friday the Bipartisan Policy Center released a report stating:

The full defense and non-defense sequester cuts for just next year could—due to their arbitrary and abrupt nature—reduce U.S. gross domestic product by roughly half a percentage point in 2013 and cause more than one million jobs to be lost over the course of two years.

The center further pointed out:

Although scheduled to go into effect on January 2, 2013, the economic effects of the sequester will be felt well beforehand. Spurred by uncertainty about the sequester’s implementation and effects, department heads will slow spending, and business leaders have already started to curtail hiring in preparation for these arbitrary cuts.

This argument was certainly corroborated by a confidential study completed last month by Deutsche Bank’s research unit that I reviewed. The survey asked 50 program managers at the U.S. Department of Defense whether they believed sequestration would actually be implemented and if so what they were doing to prepare for it. Only 16 percent thought the chances were less than even. Half thought the probability was 70 percent or greater. But perhaps most disturbing was the fact that 30 percent of the group said they had already started adjusting their government contracting in the current fiscal year to more effectively manage the possibility of a sequester—and other contract obligations are already slowing down as is the flow of federal funds and job creation in the real economy.

The Deutsche Bank survey examined only Department of Defense program managers, but there is little doubt that the same thing is happening in the other 14 departments and in independent agencies such as NASA. Since about 30 percent of all government contracts are consummated in the fourth quarter of the fiscal year (the three months between July 1 and September 30), a potentially large chunk of the $160 billion that would otherwise be going out the door into the broader economy won’t be in 2012.

But there are a lot more shoes to drop in this developing fiasco. Sequestration will cut government contracts with private industry in the coming year by about 10 percent, or $50 billion. Problem is, the contractors do not know which $50 billion of the approximately $530 billion the government spends on contract each year will be cut. That is a real problem because they are required by federal law to send layoff notices to any employee that is removed from their payroll at least 60 days, and in some states 90 days before the layoff occurs. Most will probably find that the judicious course is to send such notices to any employee that might be affected, and that could be most of the workforce of many contractors.

If contractors decide to notify half their employees of possible layoffs, it will mean about 3 million notices going out in September and October—hardly a good approach to strengthening consumer demand in a weak economy.

Another big shoe to drop is the impact that sequestration will have on the buying habits of about 1.5 million households who happen to have breadwinners who are federal workers. Based on preliminary planning in some agencies, those workers could well face at least five-to-six-week furloughs during the nine months beginning January 2, 2013. (For an explanation of why such furloughs are the likely response to across-the-board cuts in most of the government, look here.) That would cut take-home paychecks by about 12 percent to 15 percent during that period. A midlevel FBI agent earning about $80,000 a year could see his monthly income drop by nearly $1,000 during sequestration while an entry-level Social Security service representative paid about $30,000 would see their monthly income drop by about $300. As more federal employees become aware of those possibilities, the less likely they are to arrange for needed repairs on their house or shop to replace the family car.

But perhaps the most troublesome aspect of sequestration is where the needs of the private sector and government activities are deeply intertwined. The Tea Party believes that there is a bright line between the economic activity of the public and private sectors, but in the real world one industry after another is dependent upon some form of government service or activity to maintain its economic health. No one has developed a comprehensive list of government activities that are critical to important private-sector industries, but here are a few possible examples:

  • Sequestration would cut about $1.5 billion from the Federal Aviation Administration budget, including possibly more than $900 million from the salaries of air traffic controllers. That would require a 10 percent to 12 percent cut in hours worked by controllers, forcing some reduction in takeoffs and landings. Currently, controllers manage airspace containing about 87,000 flights a day. It would be reasonable to expect a 10 percent reduction in hours worked to result in the cancellation or as many as 5,000 flights per day. How would that affect commercial airlines? Package delivery services such as FedEx or UPS? Or businesses whose sales forces rely heavily on air travel?
  • The Food Safety Inspection Service has a budget of $1 billion and a workforce of about 10,000. Among the responsibilities handled by this agency is compliance with the Federal Meat Inspection Act of 1906, which requires a federal inspector to be on the premises when slaughterhouses, packing plants, and poultry processing facilities are in operation. Under sequestration, the agency may well have to furlough employees for about 20 million hours between January 1 and September 30, 2013. Will companies such as Hormel Foods LLC, Smithfield Food Inc., Perdue Farms Inc., and Tyson Foods Inc. have to suspend operations for certain periods each week because of these cutbacks?
  • Foreign travelers are currently spending about $140 billion a year on airfare, hotels, and other travel-related expenses in the United States. A significant number require visas. The current waiting period for receiving a U.S. Travel Visa is above 50 days in most parts of the world. Sequestration will slash the consular workforce, significantly reducing the number of visas granted and with a disproportionate impact on certain parts of the country (including Florida, Nevada, and Arizona) that are still struggling to gain economic traction.

How about the slowdown that will certainly occur at the Food and Drug Administration in the evaluation of clinical trials? The so-called “valley of death” that pharmaceutical companies face in bringing new drugs to market will get bigger as it takes longer to move into the next stage of clinical trials or gain approval for clinical use. How about companies waiting for the processing of patent and copyright applications? And will the U.S. Customs and Border Protection Service be able to staff U.S. border crossings, let alone deal with the already substantial waiting periods at some of those crossings?

Republicans in Congress have recently made it clear that they are concerned about one aspect of sequestration—the impact it will have on defense. But as the examples above illustrate, the impact of the nondefense sequestration cuts could be even more devastating to the economy than the defense cuts. Together, though, defense and nondefense cuts will deliver direct blows to millions of families who work at companies that do business with the government or who actually work directly for the government. Cuts in both defense and nondefense portions of the budget will also endanger national security as dozens upon dozens of government activities outside the Pentagon play a vital role in antiterrorist operations, the war on drugs, our ability to respond to international crises, preventing money laundering, and dealing with the threat of foreign espionage.

Cuts in nondefense programs would almost certainly create severe problems within the Federal Bureau of Investigation, U.S. Attorney Offices across the country, State Department missions worldwide, the Coast Guard, border security, Health and Human Services Department efforts to detect and defend against chemical and biological weapons, and Treasury Department efforts to monitor international money transfers used in support of nuclear proliferation and terrorist activity. But nondefense cuts would have an even bigger impact on the economy. They would harm not just one industry but many. From commercial airlines to meat processing, U.S. businesses would be hamstrung by the arbitrary and senseless denigration of vital government services.

The spectacle that is about to unfold would damage America in one other way: It would add to the perception that we are no longer a society that can get it right. For the 60 years following World War II, the rest of the world looked up to the United States as the gold standard for governance and management of the affairs of state. As global markets revealed last summer, however, that vision was substantially tarnished by the impasse over debt-ceiling legislation and the debate that surrounded it. There has been a growing perception both here and abroad that our country has suddenly become incompetent in its ability to act in our own self-interest—that we repeatedly shoot ourselves in the foot rather than face up to even moderately difficult choices.

This makes the entrepreneurship of our own people more difficult. Nor will we get the benefit of the doubt when global investors are making decisions about the future location of research centers or production facilities. All this would weaken our ability to grow and provide good jobs and good incomes to our own people.

Congress needs to own up to the fact that sequestration was a massive mistake that is already eroding our prospect of continued economic growth. Congress should fix this problem before they go home in August. The parameters of a real, long-term solution to our fiscal challenges are obvious: a mix of spending reductions and revenue increases that have been proposed by numerous bipartisan commissions and are reflected in President Obama’s budget. Congress has had nearly a year to solve the problem it foisted on the country, but Republicans refuse to consider any meaningful tax increases everyone knows are necessary to reach agreement.

While a long-term solution is more desirable, at a very minimum they should delay the effective date of sequestration until the beginning of fiscal year 2014 on October 1, 2013, giving the newly elected leadership in Washington nine months to find a long-term solution. Even a short-term delay will necessarily require some down payment in reducing the long-term growth of the public debt, but that down payment should be much easier to achieve than an overall solution to the deficit problem.

Saving more than the $109 billion in across-the-board cuts required by sequestration is a job that even this Congress could accomplish if it put its mind to it. It should include some reduction in entitlement spending and some increase in revenues. It should demonstrate to the world that we are willing to put all elements of our problem on the table and move toward a sensible solution—one that gives hope that we will move toward a solution to our overall fiscal problem in the year ahead. This is simply not that hard. Surely there are 218 members of the House and 61 senators that recognize that this time bomb needs to be defused now and that this is the only course that will defuse it.

Scott Lilly is a Senior Fellow at the Center for American Progress.

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Scott Lilly

Senior Fellow