The president warned about sequester last night in his State of the Union. The service chiefs are marching around Capitol Hill crying doom and gloom. The defense industry is once again decrying the impact of sequester on employment and the economy (well, their part of the economy). As we approach March 1, the cacophony on sequester is growing. And, after more than a month of being asked by the White House to keep silent, the domestic agencies, which are actually seriously affected, have begun to speak out.
Last week, the White House released a "fact sheet" about the impact of sequester on jobs, families, and the economy, which, rightly, made absolutely no mention of the impact on defense. The domestic impacts would be severe: For a time the FBI would lose the equivalent of 1,000 agents; the Justice Department would lose lawyers; the Food and Drug Administration would lose staff who approve new drugs and ensure food safety; the International Trade Administration would lose export promoters; the IRS would lose tax responders during tax season; the Occupational Safety and Health Administration would pull inspectors for a time. You get the idea.
These consequences are the result of anticipated furloughs of federal employees. Asked if he could give a precise number of federal employees and contractors who would be affected, the controller of the Office of Management and Budget said he could not: "I just know it's high; it's in the hundreds of thousands of employees, but I don't have a specific estimate."
These are serious impacts and they hit domestic agencies particularly hard because non-defense agencies are personnel heavy. Non-defense agencies employ roughly 2 million civilians, and buy about 25 percent of what the entire federal government buys. The Department of Defense, on the other hand, employs only 800,000 civilians, and consumes the other three-fourths of total government buying. Yes, DOD has a lot of people, but the wages and benefits of the 1.5 million people in uniform are exempt from sequester. Nearly a third of the defense budget is tied up in contracts for research and production performed in the private sector. While sequester would reduce future funds for contracts, the automatic cuts will not affect dollars that are already obligated.
For DOD, this means sequester hits civilian personnel and services contractors, who often work on so-called Indefinite Delivery/Indefinite Quantity (IDIQ) contracts. (That means the agency buying the service has the capacity to ask the contractor to do work, but it is never clear when or for how much, making IDIQ contracts a likely target for sequester.) At the Pentagon, this will mean reduced funding for operations and maintenance.
That account includes the DOD "back office," which is both large and filled with duplicative efforts. Defense officials can do things like eliminating separate surgeons-general and administrative stovepipes for health programs before making dramatic flag-waving decisions like delaying the deployment of a second carrier to the Gulf. And the sequester rules make such a choice entirely possible; the building has known it for months.
For the domestic agencies, it is tougher sledding. While Social Security and Medicare are exempt from sequester -- so benefits will continue -- the staff providing programs and benefits will be spending an unpaid series of Fridays at home. The things Americans have become used to getting from their government -- services, for the most part -- are also likely to slow down.
Until last week, we only heard the complaints from DOD, the agency with the largest exemption and the greatest flexibility in managing sequester. As I suggested last week, the administration seemed to figure that the squealing from DOD will get Republican attention and end the sequester sideshow. Perhaps now they are broadening the focus to areas of more severe consequence, to help focus Congress on negotiating a budget solution.
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The Washington Post seems to have become the house organ for those who insist the defense budget must be saved at all costs, arguing today that the "fiscal cliff" (which I have described as a fiscal "slide") would be a disaster for defense.
It's a case made by a number of folks, most of them (like the defense industry and the neo-conservative think tanks) cozier with the Iron Triangle than the Post. And, given that we spend more on defense than most of the rest of the world put together and have a global military capacity second to none (no one else even tries to match us), the argument falls on its face.
What is disturbing about the Post editorial, however, is not only that it is wrong on the merits, it is simply wrong on the facts. It claims that sequester would force the Pentagon to "fire" more than 100,000 civilian workers. Presumably, they got that number from a back-of-the-envelope report by the Center for Strategic and Budgetary Assessments.
But even the CSBA study acknowledges that "furloughs" are part of the likely DOD response to a sequester. Lay-offs simply cost too much to carry out, and the furlough route, while tough, would be manageable in a department that has the largest back office (proportionally) of 29 countries whose "tooth-to-tail" ratio was studied by McKinsey in 2010. Only the Swiss, who have not gone to war in centuries, have a larger back office.
The Post says training for non-deployed forces would be cut back in a sequester, but training funds are in the most flexible accounts under a sequester, allowing DOD managers to protect training, if they like, and maybe cut less grass at Ft. Belvoir for a few months.
Oddly, the Post says shipbuilding funds would decline 4.5 percent under a sequester, though the Office of Management and Budget has said clearly that the sequester would take 9.2 percent of defense resources. In any case, the sequester leaves untouched current contracts and programs in shipbuilding and elsewhere, with no impact on current production.
Most bewildering of all, the Post argues that management savings could be had, especially in the area of health care programs "which consume nearly 30 percent of the budget." Health care programs are certainly an issue at DOD, as they are for the rest of us. But according to the Congressional Budget Office, health care programs consume 8 percent of the defense budget, not 30 percent. As Daniel Patrick Moynihan famously put it: "You are entitled to your own opinion, but you are not entitled to your own facts."
The debate over the defense budget, in the larger framework of the coming month's fiscal negotiations, is going to be interesting. But it is not doomsday for defense. And arguing from strange facts does not make it otherwise.
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While the nation's capital burns with gossip about David Petraeus and his love life, the fiscal cliff is not far away. I don't often wade into the waters of broader federal budgeting, but people are beginning to explore the endgame of this Beckettian drama and a few wonder about its implications for the defense budget. Defense is just a residual issue here; the big top is focused on revenues and entitlements.
Paul Krugman says the whole cliff fracas is a diversion, especially at the leading edge of a recovery; keep spending until the economy is healthy.
Unfortunately, the political system and the march of law and time are inexorable. Those pesky Bush tax cuts expire at the end of the year, so something must be done, either to extend them or to split them in two, the way Obama proposes: families with over $250,000 of income get a higher rate -- up from 35 percent to 39.6 percent -- while everybody else keeps the lower rates in the original legislation.
A few other items are lying around, needing urgent repair before damage is done. The Alternate Minimum Tax is not indexed for inflation, so more middle-income families (including yours truly) will get whacked next April, unless the AMT is at least "band-aided" for the 2012 tax year. America's doctors are surely going to lobby against letting their Medicare reimbursements fall, which happens at the end of December. It seems like very few Americans are going to lobby to perpetuate the 2 percent reduction in the payroll tax for Social Security, so maybe that is gone; the same may be true for the extension of unemployment benefits, now that the economy is headed to recovery.
The long poles in the circus tent are sequestration, the likelihood that we will again bump up against the debt ceiling toward the end of 2012 (with Treasury vamping to postpone the problem into February), and the threat of a government shutdown on April 1, in the absence of final appropriations.
The debate is all about these issues, especially whether the White House and the Republicans in the House are prepared to put the biggies on the table: revenues and entitlements. Defense is the side-show, even though the "defenders of defense" have danced up and down for more than a year, trying to make it the main event.
It seems to me likely that one of two scenarios plays out over the next six weeks (or 14 legislative days, if you count that way). Either way, it will be sausage, not a Grand Bargain.
Option One: Dive off the cliff. The president lets the tax cuts expire and sequester happen. The Office of Management and Budget defers the impact of the sequester by apportioning funds to agencies at the level appropriated in the current continuing resolution (which goes until March 27, 2013), so spending does not actually take a whack right away.
The new Congress comes in and starts with the functional equivalent of a clean slate -- tax rates have gone up, the sequester has happened (but the impact is deferred). They start a new round of talks with the president, leading to an agreement that kicks the can down the road. The agreement is a framework on the issues that matter: revenues and entitlements. The framework sets targets for both, raising revenues and lowering entitlement spending projections. But there are no details: these are left to the Senate Finance Committee and the House Ways and Means Committee to fill in by a given deadline. Over to you, David Camp and Max Baucus.
In this scenario, discretionary spending is a residual issue. Perhaps the agreement lowers the "caps" set out in the Budget Control Act of August 2011 to make the numbers work. Defense dollars fall below the numbers projected in the current caps. David Leonhardt thinks so; so do I.
Advantages of Option One: it sets new baselines for revenues and for discretionary spending. Anything the next Congress does to change those baselines looks good, because Congress can claim that it lowered taxes (from the new baseline) and that it raised spending (from the baseline).
Disadvantage: The markets may not be happy, sending the stock market into a tailspin nobody wants.
Option Two: this same deal is reached before the end of the December. Disadvantage: the new Congress is cut out and there are no new baselines for revenues and discretionary spending.
Advantage: the markets like the agreement and the recovery appears to continue. It has the same effect on discretionary spending: it is a residual. To get the overall number, defense still goes down below the current caps, possibly even in FY 2013.
Either way, from the view of someone in the defense business, the consequence of defense being a side-show, with reductions needed to get the whole package to line up with the existing or new spending targets, is that defense budgets continue to go down.
Just what I always thought.
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Gordon Adams tracks the budget and the national security establishment for FP.