Sequester Fears May Be Overhyped, Overblown and Overly Politicized

Let’s be clear about one thing: The across-the-board spending cuts known as the "sequester” aren’t a doomsday scenario, or a meteorite that will blow up the economy.

Teachers, FBI agents, and Border Patrol officers will not get fired tomorrow, when the sequester kicks in. The Internal Revenue Service will still be able to process your tax return in April. Preschool programs won't kick out 70,000 little kids until the fall, according to Education Secretary Arne Duncan—and that’s if the spending cuts stick. Unemployed people, arguably some of the worst-off of the lot, will not see their federal benefits reduced by 11 percent until April at the earliest, says the National Employment Law Project. This is roughly four weeks away, giving Congress and the White House time to act beyond the March 1 deadline that has been touted in headlines and press conferences for the past week.

The immediate impact of sequester is “absolutely overhyped,” says Steve Bell, senior director for economic policy at the Bipartisan Policy Center and a former Republican staff director for the Senate Budget Committee. “A sequester will occur and, the next day, the likelihood is that almost no one will know that it started.”

The only guaranteed effect over the next few days, Bell and his colleagues say, is that federal employees across agencies will likely start receiving 30-day furlough-warning notices. The 150,000 federal employees, represented by the National Treasury Employees Union, still have little guidance on the timing or structure of those furloughs, says Colleen Kelley, the union’s national president.

So why all the shouting about these disastrous spending cuts? Well, in the long run (i.e., the next six months), they will put a drag on the economy, cost us jobs, and cut money from the federal budget in a blunt -- rather than careful -- manner. But for now, much of the doomsday talk is old-fashioned politics.

Sequestration is not an economic or policy fight. It’s an ongoing, roiling political argument about the amount of money the federal government spends and the manner in which it does it. This long-time spending argument between the political parties has been distilled in this round of fiscal warfare to a wonky-sounding word and given an ominous deadline. Yet, its greatest immediate legacy may be the fodder it has provided for the 24/7 news cycle and the ammunition it has given the White House as it tries to beat down the Republicans in the court of public opinion. 

To cut through the hysteria surrounding sequestration, here are some facts to counter the myths.

THERE’S FLEXIBILITY AGENCY-TO-AGENCY

The myth is that the sequester cuts will hit all at once on Friday, and federal budget officers at various agencies will be forced to immediately cut a big chunk of money from a very specific list of departments and programs. In truth, the administration and certain agencies do have a little flexibility depending on the way they define their programs, projects, and activities. The specificity of those definitions varies not just between agencies, but within them as well.

Take the Defense Department. Civilian salaries, funds for fuel, and other forms of operation and maintenance are defined at the account level, meaning that the department may have more flexibility in how to make those cuts.

So, instead of reducing costs for refueling, they could furlough more people, or instead of furloughing, find another fix, say Shai Akabas of the Bipartisan Policy Center. Sequestration only mandates cuts at the “program, project, and activity” level, as defined by the laws governing each agency’s appropriations.

DELAYING THE CONSEQUENCES

Federal departments and agencies also have some flexibility in the timing of the sequester cuts, says Charles Konigsberg, a former assistant director of the Office of Management and Budget during the Clinton administration. They could, for instance, delay implementing any cuts until the summer or fall. Of course, this strategy could backfire if Congress does not act and an agency runs out of money, but if a budget officer is willing to take the risk, such a move could also buy time and possibly more money through the fiscal year … with the assumption that Congress will eventually undo sequestration.

FURLOUGHS WON’T START FOR ANOTHER MONTH

There’s so much hand-wringing about the furloughs, when most of them will not even begin until April or later. Teachers and aides, for instance, will not face furloughs until the fall, Duncan said at a White House briefing on Wednesday. The timing of other furloughs could be seriously delayed, as the unions that represent some federal employees negotiate with the agencies on the timing and structure of the unpaid leave.

A SLOW-MOTION ECONOMIC IMPACT

Even the immediate economic impact of the sequester may be overblown. Yes, the spending cuts will take money out of the economy and drag down growth by as much as 0.6 percentage points in 2013, but “the immediate impact will not be that large,” says Nigel Gault, chief U.S. economist of IHS Global Insight. The stock market certainly isn’t worried. The Dow closed at level not seen in the past five years and close to a record high.

Instead, the economic impact of the spending cuts will seem like a slow-moving train wreck, Bell says. It will take months to work its way into the economy, drag down growth, and lead to enough job losses to tick the unemployment rate upward in 2014.

“I think what the economic data effectively shows is: ‘Here’s what will happen once everything is phased in,” Gault adds. It’s just that the full weight of the cuts won’t kick in until the summer and early fall, making March 1 and all the hype surrounding it seem like a manufactured crisis.