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Sunday, February 24, 2013

To Sequester Or Not To Sequester — That Is The Question

“We must not let our rulers load us with perpetual debt.” — Thomas Jefferson, letter to Samuel Kercheval — 1816

The news is full of talk and debate of the subject of something called “Sequestration.” But what does sequestration mean?

According to the Glossary of Political Economy Terms sequestration means:

“Originally a legal term referring generally to the act of valuable property being taken into custody by an agent of the court and locked away for safekeeping, usually to prevent the property from being disposed of or abused before a dispute over its ownership can be resolved. But the term has been adapted by Congress in more recent years to describe a new fiscal policy procedure originally provided for in the Gramm-Rudman-Hollings Deficit Reduction Act of 1985 — an effort to reform Congressional voting procedures so as to make the size of the Federal government's budget deficit a matter of conscious choice rather than simply the arithmetical outcome of a decentralized appropriations process in which no one ever looked at the cumulative results until it was too late to change them. If the dozen or so appropriation bills passed separately by Congress provide for total government spending in excess of the limits Congress earlier laid down for itself in the annual Budget Resolution, and if Congress cannot agree on ways to cut back the total (or does not pass a new, higher Budget Resolution), then an "automatic" form of spending cutback takes place. This automatic spending cut is what is called "sequestration."

Under sequestration, an amount of money equal to the difference between the cap set in the Budget Resolution and the amount actually appropriated is "sequestered" by the Treasury and not handed over to the agencies to which it was originally appropriated by Congress. In theory, every agency has the same percentage of its appropriation withheld in order to take back the excessive spending on an "across the board" basis. However, Congress has chosen to exempt certain very large programs from the sequestration process (for example, Social Security and certain parts of the Defense budget), and the number of exempted programs has tended to increase over time — which means that sequestration would have to take back gigantic shares of the budgets of the remaining programs in order to achieve the total cutbacks required, virtually crippling the activities of the unexempted programs.”

As the former owner of a medium-sized business my partners and I were forced to make cuts a four times in my 33-year tenure as an owner and principal. These cuts were due to turn-downs in the economy — turn-down that reduced our client base.

When these turn-downed occurred we, as principals, would gather and the CFO would present us with his financial projections showing that if we did not make cuts our bank would freeze our line of credit — credit we needed for cash flow and payroll. He would show us where our expenditures had grown and how we needed to reduce these costs if we wanted to remain a healthy, viable business and protect our most valued employees. It was up to us, as managers to make the tough decisions as to where to make these cuts — cuts that were very distasteful to some of us.

We would always begin with our general and administrative costs — costs for things such as office supplies, new equipment, travel, etc. The problem was that these cost reductions, while prudent and necessary were never enough to satisfy the CFO’s projections. We had to cut deeper and this was always with staff. Our largest expense, amounting to almost 50%, was employee costs. These costs included direct payroll and indirect employee costs including; medical insurance and employer contributions to Social Security, Medicare, unemployment insurance, state disability insurance, and other mandated taxes.

In times of economic growth we always managed to add staff that we thought was needed. We would have to consider a secretary here and marketing assistant there. Sometimes it was a project engineer or project manager who did not have enough work. All of these people were good people who had been scrupulously hired and trained. This was always a tough decision and created vigorous debate on who should be laid off. Everyone had a favorite and it inevitably came down to my favorite was more important than your favorite. Eventually, after painful debate decisions were reached and the necessary reductions in staff took place. Of course as the economy turned and we entered a period of growth we would once again over-staff and have to go through this painful process again.

Our federal, state, and municipal governments go through the same cycles. The difference is that their “line of credit” can be easily increased by borrowing for the people and other governments and they can increase revenue by imposing new taxes and raising the existing taxes.

The politicians who control spending all have favorites and like us each one2013-02-20-chronicle has a favorite more important than the next person’s favorite. It is those favorites that placated their constituencies and keep them in power. It tough to tell those who voted for on the basis that would get more free stuff to tell than that free stuff was going away. This is why we ended up with sequestration calling for across the board cuts.

During the summer 2011 debt ceiling battle, President Obama's White House came up with the idea of sequestration. It is a mechanism designed to trigger automatic spending cuts in the event that a congressional "super committee" couldn't agree to at least $1.2 trillion in deficit reduction.

Congress passed the White House proposal, and Obama signed it into law. And in November 2011, Obama vowed, "I will veto any effort to get rid of those automatic spending cuts to domestic and defense spending. There will be no easy off-ramps on this one."

How times have changed. With the automatic spending cuts scheduled to go into effect March 1, it's now Obama who is imploring Congress to undo them. As is his wont, he's resorting to demagoguery to make his case.

Surrounding himself with first responders during a speech on Tuesday, Obama predicted a virtual apocalypse if the cuts he once supported now go into effect. "Emergency responders like the ones who are here today -- their ability to help communities respond to and recover from disasters will be degraded," he said. "Border Patrol agents will see their hours reduced. FBI agents will be furloughed. Federal prosecutors will have to close cases and let criminals go. Air traffic controllers and airport security will see cutbacks, which mean more delays at airports across the country. Thousands of teachers and educators will be laid off. Tens of thousands of parents will have to scramble to find child care for their kids. Hundreds of thousands of Americans will lose access to primary care and preventive care like flu vaccinations and cancer screenings."

In the real world, however, the sequester cuts are actually modest when viewed relative to the budget as a whole. As the accompanying graph demonstrates, the $85 billion in combined cuts to defense and nondefense programs amount to just about 1 percent of money spent by federal, state and local governments. Over a decade, the $1.2 trillion in scheduled cuts are barely more than a rounding error when compared with the $48 trillion the federal government would otherwise spend, according to the Congressional Budget Office.

To say sequester will not be painful for many would be untrue. But if Obama wants to preserve his credibility, he should probably stifle the Chicken Little routine. The historical and continued growth in government spending will not even stop to take a breath, because the "cuts" in spending are actually just reductions in the projected growth of government spending.

Even with sequester's $84 billion in cuts (2.5%of federal budget) this year, government spending will be higher than it was last year. In fact, spending is projected to increase every year over the next decade.

If Obama can't manage an ever-growing budget like this one without turning criminals loose on the population, then perhaps he's out of his league serving as president. I don’t think he would have lasted long at one our principal meetings.

When the Budget Control Act was adopted, it called for the automatic cuts to begin on January 1, 2013 —three months into the U.S. Government’s fiscal year (October). To the surprise of no one, the House and the Senate and the President didn't want to live with the fruits of their fruitlessness; and so on January 2, 2013 they passed a quick law delaying the effects of sequestration until March 1, 2013 — five months into the fiscal year. That bill was grandly named the American Taxpayer Relief Act of 2012. That's the one that raised income taxes on rich people and payroll taxes on the rest of us thus providing tax relief to no one.

You might have noticed that the House, the Senate and the President are so worried about this looming March 1 deadline that they are — all 536 of them — on vacation. Here's what we know: The Congress and the President are incapable of cutting anything from any program, ever. If the only way to reduce spending is by instituting automatic cuts, then I am for allowing sequester to take effect and see what happens.

Instead of letting obsolete government programs die, bureaucrats come up with new excuses to keep spending. The Washington Post reports on a federally supported program that is so bad that even President Obama wants it cut. The Christopher Columbus Fellowship spent 80 percent of its money on overhead. Three Republicans introduced legislation to end it, but the subsidy lives on, because one senator, Thad Cochran, R-Miss., likes it. So America continues to move toward bankruptcy. Instead of addressing that, the politicians will spend more. Instead of announcing 15 new 'manufacturing' hubs, the president should just announce 300 million 'do whatever you want with your own money' hubs. Then American citizens can do as they please.

Many lawmakers view commitment as nothing more than a marriage of convenience that lasts only through Election Day. Where else can a presidential candidate run for office proclaiming 'Read my lips: no new taxes' and within months of assuming office, support a massive tax hike on the American people? Politicians including President Obama, Vice President Joseph R. Biden Jr. and Sen. Robert P. Casey Jr. of Pennsylvania pledged fidelity to the Second Amendment during their campaigns, yet now these Democrats propose and support the most comprehensive attack on gun ownership in generations.

The debate over cuts always centers on the efficacy of the program being cut and not on the constitutionality of the program. What warrant in the Constitution allows for financial support for teachers, local police, and firefighters? As important and useful these classes are they are to be supported from local property taxes. It makes great TV, however, to line up doctors, firefighters and cops behind the President as he whines about how this miniscule cut will cause great harm to the citizens. That’s just so much balderdash.


The scheduled implementation of the sequestration spending cuts is a little less than a week away, which has Republicans, Democrats, bureaucrats, special interests, and the media warning that the apocalypse is nigh. Sequestration isn’t the ideal way to cut spending, but it would be a start. And despite all the wailing and gnashing of teeth, the areas of federal spending targeted by sequestration should be cut. Here are a few recommendations — recommendations based upon the constitutional validly of the program or the bloated budgets that have grown over the years.

Let’s begin with the Department of Defense. While all defense spending falls within Article I, Section 8 of the Constitution. However, over the years the DOD has such a massive budget that many within the department have no idea on where the money is being spent. The Department of Defense oversees a vast array of people and assets at home and abroad. We would improve the nation’s security by reducing our global overreach and adopting a more restrained and defensive strategy. We should cut the number of military personnel and reduce overseas deployments to save money and relieve burdens on military families.

The department spent about $688 billion in fiscal 2012, or $5,800 per U.S. household. It employs 2.3 million people, and it spends $230 billion a year on procurement, research, and construction. I am sure that under intelligent management the managers in the Pentagon can survive a 2.5% cut without affecting our national defense one iota.

The department’s budget is built on an excessively ambitious strategy that tries to do too much, but leaves the nation less safe from true threats. Defense is a core federal function, but much of the work of today’s military has little to do with protecting our vital interests.

Rising personnel costs have added to the ballooning defense budget. The Army and Marines have grown 15 percent since 2001, driven by the view that future wars will resemble those in Iraq and Afghanistan. But it is not in our interest to topple foreign regimes and attempt long-term nation building. For combating terrorism, we do not need such a large Army as we have today. We have seen what small, well trained special operations units and technology, such as UAVs, can do in today’s asymmetrical warfare against terrorism.

Cuts to federal pay: With projections of huge federal deficits for years to come, policymakers should scour the budget looking for places to cut spending. One area to find savings is the generous compensation paid to the federal government's 2.1 million civilian workers.1 Total wages and benefits paid to executive branch civilians amounted to $236 billion in 2011, indicating that compensation is a major federal expense that can be trimmed.

During the last decade, compensation of federal employees rose much faster than compensation of private-sector employees. As a consequence, the average federal civilian worker now earns twice as much in wages and benefits as the average worker in the U.S. private sector. A recent job-to-job comparison found that federal workers earned higher wages than did private-sector workers in four-fifths of the occupations examined.

The federal workforce has become an elite island of secure and high-paid workers, separated from the ocean of average American workers competing in the global economy. It is time for some restraint. Federal wages should be frozen or cut, overly generous federal benefits should be overhauled, and the federal workforce downsized through program terminations and privatization. It is unfair to ask taxpayers to foot an ever-increasing bill for federal workers, especially when private-sector compensation has not kept pace.



As a note on the size of the federal workforce I can testify to a personal experience I had at the Department of Commerce in 1998. This was during the Clinton era of “downsizing the size of the federal government. I had an appointment with an Assistant Secretary of Commerce at the Hoover Building in Washington D.C. When I walked into his office I noticed two women sitting in his outer office talking with each other. I paid no attention to this as I was more concerned about my meeting with the assistant secretary. When I entered his office and introduced myself he was very polite and attentive to my comments regarding international trade, specifically for my firm’s wish to offer geographic information services in turkey. As we were talking he kept glancing out of his window at the two women in the outer office. Finally he could not contain his frustration any longer and launched into a tirade about the inefficiencies and bloated size of the federal work force. He told me had been saddled with these two women, without his request or need, because the department where they previously worked had no need of them and wanted to reduce their staff and look good. He proclaimed, with some degree of disgust, that this is the way the federal government downsizes and pushed employees from one department to the other to hide them. That’s the way it works all throughout federal and state government. I believe the federal workforce cut be cut by at least 10% to 15% during the next five years by attrition and buy-outs if the executive was branch was serious and the various departments were strictly monitored for playing hide the pea game. If my firm could do this without skipping a beat I am sure the feds can do the same.

Federal Grants to Firefighters: In 2012 the House passed a $40.6 billion Homeland Security appropriations bill for fiscal 2012. The Constitutional Authority Statement for the bill cited Congress’s authority to appropriate money and the General Welfare Clause. Citing the General Welfare Clause might be appropriate for activities associated with the common defense of the nation. However, it is not an appropriate justification for something like the Federal Emergency Management Agency’s Assistance to Firefighters Grant program, which distributes federal taxpayer money to local fire departments.

Firefighting is a purely local concern and should be funded by those who benefit from a local fire department’s services. Why in the world am I paying federal taxes in Pennsylvania to a bureaucracy in Washington so that it can turn around and send a check (minus a cut for the bureaucracy) back to my local fire department as well as to thousands of other fire departments across the country?

In a Cato essay on constitutional basics, Roger Pilon explains that the General Welfare Clause clause was not intended to provide cover for Congress to spend money on whatever it wanted

“The General Welfare Clause is followed by a detailed listing or enumeration of activities that Congress is allowed to engage in. Were this passage to be read simply as authorizing Congress to tax and spend for the general welfare, as many read it today, Congress would have been granted all but unlimited power and the enumeration of particular powers immediately thereafter would have been to no purpose. Thus, the passage must be read as permitting taxing only for those enumerated ends; and the clause restricts such funding to the general welfare only, not to the welfare of particular parties.”

Our Founding Fathers did not intend to give Congress a blank check to spend money on the passions of the day or to placate a narrow group of constituents at the expense of the people in order to garner votes to retain their power. As Alexis de Tocqueville stated in his Democracy in America:

“The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.”

Head Start and Other Subsidies: The Department of Health and Human Services runs a vast array of health and nonhealth subsidy programs. Outside of Medicare, Medicaid, and Temporary Assistance for Needy Families (TANF), the department spends about $125 billion a year on more than 400 different programs.

There are four HHS state and local subsidy programs aimed at the low-income population: Head Start, the Child Care Fund, the Social Services Block Grant, and Low-Income Home Energy Assistance. These programs are intensely bureaucratic and susceptible to fraud and abuse. There is also little evidence that the programs generate much of a return for the large taxpayer resources invested in them. For example, a recent authoritative study found that Head Start offers no lasting advantages to the children who take part in the program. It found that by the third grade any advantage a child had from participating in Head Start had been lost.

There are no economic or constitutional reasons why the federal government should be involved in these four programs and the other state and local welfare activities of the HHS. Congress should end HHS state and local aid programs, and individual state governments should decide for themselves what taxpayer support, if any, is appropriate for these sorts of activities. As I have stated to ad nauseum the powers enumerated in Article I, Section of the Constitution provide no warrant for these welfare programs. It is left to the individual states to decide if they are worthy of taxing their citizens to support them.

Under the Constitution, the federal government was assigned specific limited powers and most government functions were left to the states. The Framers reinforced this decentralized structure with the addition of the Constitution's Tenth Amendment: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." Providing welfare or social services to individuals, despite the good intentions of policymakers, is not a constitutional role of the federal government.

Practically, federal funding of state and local activities results in multiple levels of wasteful bureaucracy and poor program oversight. Funding for welfare programs originates at the federal level, goes through state and local governments, and then to nonprofit groups and the ultimate recipients. As the money flows through each level, a portion is lost to administrative overhead. Each government and organization involved consumes program funding with proposal writing, funding allocation issues, reviews, reporting, regulatory compliance, litigation, and many other bureaucratic activities. It’s time to end these programs for two main reasons: they are unconstitutional and they are wasteful. But once again the politicians have promised free stuff and are unwilling to go back on those promises.

Community Development Programs: During most of the nation's history, there was little fiscal interaction between the federal government and local units of government. The federal government had a limited set of responsibilities, and most governmental functions were left to the states. Local governments were subsidized and regulated by state governments, but generally not by the federal government.

That structure changed dramatically during the mid-20th century as the federal government launched an array of housing, urban renewal, and community development efforts. It was a grand experiment to use the seemingly vast resources of the federal government to try to micromanage the life of cities and neighborhoods. The experiment was a grand failure, as illustrated by the many public housing projects that became plagued with crime and disorder.

In recent years, some housing and welfare programs have been reformed, but the federal government still funds an array of "community development" activities for local governments. Community development funds were originally targeted to large cities in decline, but today funding is spread widely to communities rich and poor, large and small.

In 2009, the Department of Housing and Urban Development spent $13.2 billion through its Office of Community Planning and Development. Here is a list of the main programs:

  • Community Development Block Grants: This $8 billion program provides formula-based grants to localities for a range of development projects such as parking lots, museums, and street repairs.
  • Home Housing Program: This $2.3 billion program provides formula-based grants for "affordable" housing.
  • Homeless Assistance Grants: This $1.6 billion program funds local governments and nonprofit groups that offer assistance to the homeless.
  • Housing for Persons with AIDs:. This $289 million program provides housing assistance for low-income persons with HIV/AIDs.
  • Self-Help Homeownership Grants: This $50 million program provides grants to nonprofit groups that build low-income housing. The beneficiaries provide "sweat equity" by contributing labor toward the construction of their homes.
  • Rural Subsidies: This $24 million program funds a wide range of projects in rural areas.

According to HUD, community development programs:

“Seek to develop viable communities by promoting integrated approaches that provide decent housing, a suitable living environment, and expanded economic opportunities for low- and moderate-income persons. The primary means towards this end is the development of partnerships among all levels of government and the private sector, including for-profit and nonprofit organizations.”

That description sounds warm and fuzzy, but the reality is that community development programs have a history of wasteful and ineffective spending.

Once again the Constitution provided the federal government with a modest array of enumerated powers and left most government responsibilities to the states. During most of the nation's history, local units of government were not financially tied to the federal government. The New Deal of the 1930s started to change that with major federal encroachment into formerly state and local policy areas. The federal government's micromanagement of local affairs accelerated in the 1960s with President Lyndon Johnson's "Great Society" and the creation of the Department of Housing and Urban Development in 1965.

Proponents of federal intervention claimed that state and local governments did not have the capacity to address urban blight, affordable housing, and economic development. That led to the launching of a huge range of urban grant programs, which President Johnson believed would create "cities of spacious beauty and living promise." (See President Johnson’s 1964 Great Society Speech) New aid programs were created for housing, urban renewal, education, and many other activities.

There were more grant programs enacted during the Johnson administration in just over six years than in all of the preceding years in U.S. history combined. There were 109 separate aid programs for state and local governments enacted in 1965 alone.5 President Johnson called his policies "creative federalism," but his activism dealt a severe blow to the federalism of the nation's Founders. By the end of the 1960s, many policymakers believed that the federal government should spend money on just about any local activity that it wanted, and questions regarding constitutional propriety were seldom considered.

Public Housing and Rental Subsidies: From Franklin Roosevelt to Lyndon Johnson, Harry Truman to Bill Clinton, American presidents and their housing administrators have cut the ribbons on new versions of subsidized housing projects. Their theory has been consistent: private markets fail to provide housing for people with low incomes, and thus government subsidies are needed to fill the gap. Even presidents such as Richard Nixon and George W. Bush, who did not promote the construction of new public housing, accepted the idea that housing markets fail the poor and backed housing vouchers for rent in private dwellings.

Since the 1930s, the federal government has funded one expensive approach to low-income housing after another — without seeming to notice that the new approaches were made necessary less by market failure than by the failure of past public policies. Public housing projects erected to replace slums soon became "severely distressed," in the phrase used by one congressional study. Housing vouchers meant to end "concentrated poverty" instead moved it around. The low income housing tax credit program provides large subsidies to developers and few, if any, benefits to low-income families.

President Obama has said that his administration will end programs that have failed. Let's hope that the administration takes a fresh look at housing programs and recognizes the distortions and damage they have created. They have failed not because of poor architecture or design, nor minor management problems, but because of much more fundamental factors. Federal housing programs distort markets in ways that undermine neighborhoods, they encourage dependency, and they do not create incentives for long-term maintenance and improvements. They also rest on the false premise that the private sector cannot provide housing for those of modest means.

Federal housing subsidies have also been expensive to taxpayers. In 2009, the federal government will spend about $25 billion on rental aid for low-income households and about $8 billion on public housing projects.

Most people agree that big public housing projects can be noxious environments for their tenants. They are disproportionately home to extremely poor, single-parent households, along with the crime, social problems, and poor academic performance associated with that demography. Ironically, public housing was originally meant to serve lower middle class working families. But as the economy boomed after World War II, those families found private homes in the growing suburbs, and by the 1960s they had abandoned public housing. Left behind were poor, nonworking families, almost all of them headed by single women. Public housing became a key component of the vast welfare network that gave young women their own income and apartment if they gave birth to illegitimate kids. As the fatherless children of those women grew up and went astray, many projects became lawless places, overrun with gang activities.

Public housing projects have also damaged the city neighborhoods that surround them. They have radiated dysfunction and social problems outward, damaging local businesses and hurting nearby property values. They have also harmed surrounding cities by inhibiting rundown areas from coming back to life by attracting higher-income homeowners and new business investment. Fear of those who live in housing projects has driven away striving, upwardly mobile people who are the ones that make neighborhoods flourish.

City policies have often made matters worse by ensuring the permanence of public housing. Since public housing cannot be bought and sold on the768px-Robertaylorhome market, it has disrupted the healthy recycling of property that helps dynamic cities grow and that spawns opportunities for rich and poor alike. Unlike privately owned buildings, public housing has almost always become property permanently fixed in a particular, low-value use, even as surrounding cities and metropolitan areas have changed.

In recent decades, hundreds of thousands of public housing units have been demolished after falling into disrepair and being overtaken by crime and disorder. Chicago's Robert Taylor homes, for example, consisting of 28 apartment buildings of 16 floors each, were completed in 1962 and demolished by 2007. Chicago's infamous Cabrini-Green complex has also been mainly demolished, as have many other troubled housing projects across the nation.

To replace some of the units of these complexes, the Hope VI program was launched in the 1990s as the latest incarnation of public housing. Hope VI focuses on creating low-rise projects with a mixed-income group of tenants. Such projects are predicated on the theory that if higher-income families live in the same complexes as poor families, the successful tenants will set a good example for the less successful tenants. Perhaps so, but so far there is no evidence of this. It might be just as likely that the children of the dysfunctional families set bad examples for the children of the more successful families.

For a good explanation of this issue see Michelle Malkin’s article “Who Failed Chicago?” in

We’ve actually been down this path before. There was a small sequester back in the mid-1980s, shortly after the Gramm-Rudman-Hollings law was enacted. There was much wailing and gnashing of teeth, but the sequestration helped restrain the growth of spending and helped bring about a record amount of deficit reduction in 1987.

There was a similar (unsuccessful) fight in 1989. Here’s what then-Senator Bob Packwood of Oregon wrote in 1989.

“…the sequester has become the focus of partisan debate. Each side accuses the other of being responsible for “deep and arbitrary” budget cuts. Some legislators say we should do whatever it takes to cancel the sequester, even if it means higher taxes. While sequester is certainly not the ideal way to resolve this year’s budget dispute, there are reasons to believe that the fiscal discipline of a sequester is the medicine we need to cure the budget process. For all its drawbacks, a sequester is real deficit reduction. Instead of budget gimmicks, accounting tricks, phony cuts, and “revenue enhancements,” a sequester would reduce spending levels by a fixed percentage in eligible spending programs. In other words, unlike most deficit reduction packages, sequestration would actually reduce the deficit.”

The only argument against a sequester, at least among conservatives, is that a sequester would impose too much of a burden on the defense budget. But I’ve already explained in this post that the defense budget will climb by about $100 billion under sequestration.

I don’t know whether Republicans are the stupid party, but I know they will be very stupid if they don’t take the sequester and declare victory. I fact I would recommend going far beyond the sequester with its 2.5% cut and shoot for at least a 10% to 15% cut in the real budget — not a cut in the proposed increase like the game played by the politicians. If they cannot cut the programs I have listed they don’t deserve to manage so much as a child’s lemonade stand.

H/T to the Cato Institute

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