There are two main problems with sequestration. The first is that the $1.1 trillion in budget cuts happen in an idiotic, across-the-board fashion. Think farm subsidies are less valuable than medical research, and thus should take a bigger cut? Too bad. Sequestration is too dumb to tell the difference.
The second is that sequestration slams the economy while it’s weak. Goldman Sachs Group Inc. estimates that it will cut economic growth by 0.6 percentage point in 2013. The Congressional Budget Office estimates that it will push unemployment back above 8 percent and may do sufficient damage to drive the U.S. economy into a small recession. In a barely recovering economy, it’s beyond stupid to choose to inflict that kind of injury on ourselves.
The good news? Both problems can be fixed, and in a way — listen up, Republicans! — that doesn’t increase taxes. In fact, they can be fixed — listen up, Democrats! — in a way that’s arguably preferable to raising taxes.
Republicans took a first step toward a solution last week, when Senators Jim Inhofe of Oklahoma and Pat Toomey of Pennsylvania proposed a bill giving President Barack Obama authority to implement sequestration with a scalpel rather than a meat cleaver.
The Inhofe-Toomey proposal wouldn’t change the basic character of the cuts. Social Security, Medicaid, Medicare, food stamps, Pell grants, veterans benefits and an assortment of other programs would still be exempt, and the remaining cuts would still be split between defense and domestic spending. For the most part, however, their plan would give the executive branch the ability to select cuts within those parameters.
Strange Idea
It’s worth taking a moment to appreciate how weird this is: The Republican solution to sequestration is to give the White House — this White House! — more power to decide how the federal government spends your money.
What happened next was, if anything, even weirder: The White House declined.
The Obama administration thinks the Inhofe-Toomey bill makes both the politics and the policy worse. The politics are worse because the White House would own the budget cuts; after all, they’d be the ones making them. The policy is worse because using a scalpel would make the cuts easier to live with, which makes sequestration harder to replace with legislation more to the White House’s liking.
Because replacing sequestration is the White House’s ultimate goal, Inhofe-Toomey is a nonstarter. Instead, Obama wants a “balanced” package including tax increases and spending cuts. Republicans, meanwhile, have sworn to oppose any and all tax increases. Those two sentences explain all the gridlock and brinkmanship Washington has suffered over the past three years.
The White House contends that the Republican opposition to tax increases has detached itself from any credible economic analysis or political strategy. Obama wants to raise taxes by cutting tax expenditures, which Republican Representative Paul Ryan characterizes as “similar to government spending” in his budget. In return for cutting tax expenditures, the White House would agree to a slew of Republican priorities, including cutting entitlements, protecting the defense budget and further reducing the deficit. And all, again, for cutting something Republicans don’t like anyway.
To White House aides, the Republican stance on taxes at this point is more of a religious creed than a policy argument. They’re right about that. But the Democratic obsession with a balanced deficit-reduction package occasionally flirts with the same mistake, in reverse.
Deductions’ Price
Consider what the White House means by cutting tax expenditures. The policy they’ve proposed caps the value of itemized deductions for high-income taxpayers. About 90 percent of the value of those deductions comes from just three parts of the tax code: the charitable deduction, the state and local tax deduction, and the mortgage-interest deduction.
So forget taxes versus spending. The choice, really, is whether it’s better for the country to cut the defense budget or to cut the incentives of rich people to donate to charity, live in high-tax states and buy expensive homes. Why should the defense budget win that fight? After accounting for the wars in Afghanistan and Iraq, defense spending has jumped from less than $300 billion in 2001 to more than $700 billion in 2012. Is all that new spending really necessary now that Osama bin Laden is dead and those wars are winding down? Indeed, according to the Center for Strategic and International Studies, the fall in defense spending if sequestration goes into full effect would be smaller than the fall in defense spending after the Cold War, the Vietnam War or the Korean War.
Moreover, for Democrats, keeping the pressure on defense spending rather than on tax expenditures enables Social Security, Medicaid, Medicare beneficiaries, Pell grants and other core Democratic priorities to avoid any cuts at all.
Even if the White House makes peace with the core concept of sequestration, the policy still cuts $85 billion from federal spending in the seven months remaining in fiscal year 2013 — an abrupt and potent hit to the economy. Aides say they won’t agree to any sequestration replacement that doesn’t protect the recovery. But that shouldn’t be an insurmountable objection. All it requires is one small change to Inhofe-Toomey.
Inhofe-Toomey gives the president discretion over implementing the cuts. It could easily be modified to give the president discretion over the timing of the cuts. Obama would still need to hit the same spending target over the next 10 years, but he could opt for fewer cuts now and more later. If Congress doesn’t like his choices, it can always overturn them; Inhofe-Toomey already provides for a vote of disapproval on the White House’s recommendations.
Everyone Wins
The upside for Republicans is that the cuts would be less blindly destructive to defense, and they would get a win on resisting tax increases. The upside for Democrats — in addition to replacing the meat cleaver with a scalpel — is they would lock in sequestration’s defense cuts along with protections for the programs they most care about. And the delayed cuts would spare the economy.
“The two biggest problems with the sequester are it’s indiscriminate and it’s hitting the economy at a very bad time,” said Jared Bernstein, a former White House economist who’s now at the Center on Budget and Policy Priorities. “This idea mitigates both of those.”
Would Republicans accept it? Perhaps not. But right now, the White House is in the odd position of refusing authority to make the cuts less damaging. If Republicans refuse to give Obama the power to phase in the cuts, they will be refusing to protect the economy from cuts this year and, appropriately, will take the blame for the resulting economic pain.
Besides, what’s the alternative? Sequestration with no discretion and no phase-in? If Democrats let an increasingly fruitless quest for a balanced deal distract them from cutting a much better deal, then they’ve fallen into the Republican mindset of letting their promises on taxes distract them from their priorities on policy.
