“We have met the enemy and he is us,” Irving said yesterday at a panel discussion, titled “Sequestration and the Fiscal Cliff,” at the American Bar Association Section of Administrative Law and Regulatory Practice’s fall conference in Washington D.C.
About 75 participants, many of whom work for the government or represent the government or its contractors, listened to panelists describe the history of U.S. financial problems and the possible impact if Congress and the president fail to reach agreement on a budget plan. Public debt has risen from 35 percent to 75 percent of the U.S. gross domestic product and now totals about $16 trillion.
“Since the early 1980s, the two political parties have been locked in a death grip over whether the country’s structural fiscal deficit should be reduced by incurring spending or increasing taxes,” said John F. Cooney, a partner at Venable LLP who also served as assistant to the solicitor general at the Department of Justice and deputy general counsel at the Office of Management and Budget. “Their dispute reflects a duality of the human mind, we would love to have our cake and eat it too. We would love to receive federal benefits but would prefer not to have to pay for them.”
That death grip did loosen a bit in 2011, when the two parties agreed to raise the nation’s debt ceiling, allowing the country to keep borrowing to pay its expenses. In the process of raising the debt ceiling, the parties also imposed a sequestration, essentially a uniform, indiscriminate across-the-board budget cut in all eligible programs, if they could not approve $1.2 trillion in budget cuts by January 2013.
The “fiscal cliff,” coined by former Federal Reserve Chairman Ben Bernanke, describes what happens if Congress and the president fail to reach a compromise and the tax increases and spending cuts take effect.
Although the Nov. 6 election may have some impact on the future of any negotiations, Congressional leaders are expected to call a “lame duck” session to try and address the issue.
Cooney said the president has some leverage in these negotiations: the Bush tax cuts expire in January 2013, and defense programs are subject to major reductions under the sequestration plan. “Sequestration is a doomsday device to force the parties to reach agreement on a long-term fiscal plan,” he added. “[But] the hardest part of a game of chicken is knowing when to quit.”
He also described the options in a lame duck session of Congress: it could pass a law that reduces the future deficit by $1.2 trillion that would cancel sequestration, or it could pass a law that delays the sequester and the expiration of the Bush tax cuts; or Congress could adopt a combination of both concepts. In essence, the federal government could make a down payment to resolve the deficit problem through spending cuts or increasing revenue.
The final option would allow sequestration to take effect, which is “the worst possible outcome,” according to Cooney, who likens the situation to Wily E. Coyote of Looney Tunes fame, chasing the roadrunner off the cliff but not realizing he has nowhere to go but crash down.
“No amount of planning can offset the adverse effects of sequestration,” said Cooney. “It is impossible to exaggerate how complicated this process would be to administer the sequestration.”
The other panelists, who included John E. Bowman, an attorney with Venable LLP and a former U.S. Treasury Department official, agreed.
If the sequestration cuts were to take effect, they will be divided 50/50 between defense and non-defense programs, panelists said. The Office of the Management and Budget projects defense programs will be cut by 9.2 percent, non-defense programs by 8.4 percent, and Medicare by 2 percent in 2013 alone, according to Cooney.
The basic rule is that the same percentage reduction must apply to each federal “program, project or activity,” but agencies will face the challenge of figuring out what exactly Congress meant by that description. On the plus side, agencies could have enormous discretion in determining how to allocate reductions. However, the sheer number of programs that each agency would have to review would be time-consuming and burdensome, said the panelists. There are currently 2,500 programs at the U.S. Department of Defense.
The options for agencies include: reducing contract awards, laying off staff or reducing rent. Cooney said the effects would be dramatic: productivity among employees would fall; contractors would scream they are paying the price for Congressional inertia and a major part of the economy would not be able to plan its operations. Certainly, the financial markets would respond as well.
“This wound would be entirely self-inflicted and entirely unnecessary,” Cooney said.
No matter what happens, there is a new normal that agencies and their contractors are facing.
“Flat is the new up,” Irving said as it relates to funding at domestic agencies. “In the end in what drives the long term outlook, there is a gap between revenue and spending.”
That gap is $22 billion in the current fiscal year.
“I would suggest that the cost to the taxpayers could be significantly higher,” Bowman said. “Only because if you want to invest in a safe investment, where are you going to go? Where are you going to go to get a return? But the continuing costs of uncertainty will have an impact on the markets, what the U.S. will do going forward and how we will be treated.”