The Unintended Consequences of Sequestration

The objective of the sequester was to build an arbitrary cliff so fearsome that the Congress would never steer us over it. Well as we know, they did, with us in the back seat. What is fascinating though, at least during our descent from the cliff, is the unintended consequences of sequester; as invariably happens when government tries to be clever.

On one hand the sequester has acted like a microscope into government dysfunctionality, but just when comedy turned to tragedy, government ironically proved itself capable of speedy and efficient functionality. On the other hand, we are learning that a 4% cut in government spending has not been as automatically lethal for our economy as some politicians threatened it would be.

If you travel you undoubtedly understand firsthand how fast dysfunctionality can impact our lives when it is directed from above. The FAA’s decision to furlough 15,000 flight controllers, by its own estimates would to cause delays of as much as four hours for travelers in major hubs.

Through the mandated cuts of sequestration, the FAA was required to cut $637 from its  budget of $15.90 billion. A full 70% of the FAA’s operating budget is payroll and 40% of that amount is applied to air traffic controllers; or essential personnel. The remaining 60% is applied to less, or non-essential personnel. Even in the early grades we understood that 60% was a majority – the larger part of a whole, and perhaps by middle school we grasped the concepts of essential and non-essential.

The FAA was required to cut $637 million from a budget of $15.90 billion or just over 4%. The obvious choices would have been for the FAA to spread the 4% cuts across the board, or maybe more wisely, toward the fat 60% non-essential part of the budget. But for reasons unexplained by math, the Administration decided to direct all of the cuts toward the ‘lean’ (if there’s such a thing) 40% part – the essential part. In so doing they turned a 4% overall cut into a 10% cut of essential functions – air traffic controllers.

Just when it looked as if dysfunctionality ruled, our government came to the rescue. Last night the Senate leapt into action and passed UNAMOUSLY, in BI-PARTISAN fashion just before going on vacation, (hmmm) a bill designed to give the Transportation Department, which administers the Federal Aviation Administration, more budget flexibility to reduce the number of FAA furloughs. The House of Representatives just followed suit. The bill allows the FAA to redirect up to $253 million from other areas of its budget to shore up staffing and operations. Even the White house was involved in the successful effort – wow. Way to go guys.

As sequestration shines a bright light on the not-so-elegant workings of government, we are also learning that, so far, it has not been the heavy-handed economy-killer as warned by some. The US Treasury Department announced yesterday that we may have more time than economists previously estimated before we reach the government’s borrowing limit because of increases in payroll taxes and higher tax receipts from individuals and businesses. Experts say reaching the borrowing limit might be pushed back another month to late September.

Individual taxes advanced 14.7% and corporate taxes rose 18.6%. Government spending totaled $1.8 trillion in the six months through March, leaving a fiscal year-to-date deficit of about $600 billion, according to the WSJ’s report of the data. Stone & McCarthy Research Associates, that more than half of this year’s higher revenue comes from the expiration of the payroll tax cut and “some shifting of income to avoid higher tax rates in calendar year 2013.” A smaller part, perhaps three to five percentage points of the 12% jump in receipts, “reflects underlying growth in the economy.”

Unfortunately, this lesson is not as clear or uplifting as our FAA example. Today, the government reported that the nation’s gross domestic product (GDP), a measure of all goods and services produced in the economy, advanced 2.5% between January and March. Economists were looking for  a 3.2% annualized bounce, but the gain of 2.5% is a substantial improvement over last quarter’s 0.4%. The chart helps put the GDP number in perspective.

516-1Some will be quick to suggest that sequestration is completely to blame for the slowdown (though the cuts didn’t begin until March). Others will say that high debt and the uncertainty surrounding how Congress will address it is causing sluggishness. Still others will say that we’ve lapsed into a collective state of malaise from years of sub-potential growth, governmental dysfunctionality, and a stark and ugly political, philosophical, and religious divide unrivaled by any in our past.

There was another government bright spot this week when five US presidents gathered to honor and celebrate the opening of George W. Bush’s presidential library in Dallas.

In yesterday’s WSJ Peggy Noonan had this to say of the event:

“The headline of the Bush Library remarks is that everyone was older and nicer. Jimmy Carter, in shades, with wispy white hair, was gracious and humorous. Anyone can soften with age, but he seemed to have sweetened. That don’t come easy. Good for him. George H.W. Bush was tender. He feels the tugs and tides of history. “God bless America, and thank you very much.” He rose from his wheelchair to acknowledge the crowd. That crowd, and the people watching on TV—the person they loved and honored most was him.”

“Bill Clinton does this kind of thing so well—being generous to others, especially former opponents. ‘We are here to celebrate a country we all love,’ he said. He was funny on how he wanted Mr. Bush to paint him and then saw Mr. Bush’s self-portrait in the bath and thought no, I’ll keep my suit on. He got a laugh when he called himself the black sheep of the Bush family.”

“I said everyone was older and nicer. It’s occurred to me that the Clintons and both Bushes were president when baby boomer journalists were in their 30s and 40s and eager to rise. Everyone was meaner, both the pols and the press, because they were all young. Now they’re in their 60s. When they went through the 9/11 section of the library, the day before the opening, some had tears in their eyes. They understood now what that day was. Young journalists: You’re going to become more tolerant with time, and not only because you have more to tolerate in yourself. Because life will batter you and you’ll have a surer sense of what’s important and has meaning and is good.”

There is a great deal of wisdom and hope in Peggy’s closing words for all of us as people and nation. We have infinite freedom to choose individually and collectively, will we become more tolerant or more bitter? Will sequestration or cooperation be our legacy?

 

 

Sam Bass
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