How to sidestep sequestration

The March 1 deadline is approaching for Congress either to reach a budget agreement or force the government to begin cutting programs, in a process known as sequestration. Analysts increasingly fear that a compromise will not be reached to avoid automatic, across-the-board cuts affecting everything from Defense Department outlays to discretionary domestic spending.

Budgeting expert Linda J. Bilmes, Daniel Patrick Moynihan Senior Lecturer in Public Policy at the Harvard Kennedy School, spoke with Gazette staff writer Colleen Walsh about the looming sequestration, and offered suggestions on how to fix the nation’s rudderless budget process. Her recent books include “The Three Trillion Dollar War: The True Cost of the Iraq Conflict” (with Joseph E. Stiglitz, 2008) and “The People Factor: Strengthening America by Investing in Public Service” (with W. Scott Gould, Brookings, 2009).

GAZETTE: Can you define sequestration?

BILMES: Sequestration is a process of making automatic, across-the-board budget cuts. The currently scheduled sequester would cut about $85 billion out of federal discretionary programs, which means all programs, including defense, that receive appropriations on an annual basis. It does not include entitlement programs like Social Security.

GAZETTE: How did we get here?

BILMES: For some years now, we have been lurching from one budget crisis to the next, and this is simply the latest iteration.  The current sequester came about because after the July 2011 budget fiasco, in which the government almost shut down, Congress decided to set up a “supercommittee” of members who would try to come up with a series of budget and tax reforms that could receive bipartisan support.  The penalty for not coming up with this agreement was that there would be an automatic, across-the-board set of budget reductions known as sequestration. This was supposed to be such an unsatisfactory solution that it would incentivize the supercommittee to reach agreement. But unfortunately, the committee was not able to agree.  So the penalty, which is the sequestration, is back on the table.

GAZETTE: Can you explain what happened in January with the first sequester deadline?

BILMES: There were two big threats that were potentially going to happen at the beginning of the year, leading to the phrase “fiscal cliff.” One was the expiration of the Bush tax cuts, and the second was the automatic sequestration. The fear was that if the tax cuts expired at the same time that [the] government cut spending by a large amount, this double whammy could push the country back into recession. Fortunately, the president was able to reach a compromise with Congress around the tax cuts. Taxes have increased for wealthier people, but tax cuts have been extended for middle-class taxpayers, except for the payroll tax, which has gone up for everyone. But the threat of recession is still there if the budget is cut as radically as the sequestration would propose.

GAZETTE: What do you foresee happening on March 1?

BILMES: I would be very surprised if the sequester went ahead without changes. It’s unlikely that Congress will take any action until the last minute, because it seldom does anything unless it is forced to. But in all likelihood, Congress will not allow such draconian cuts to take place, especially in the Defense Department. What will probably happen is that there will be some kind of compromise on the sequester, and they will kick the can down the road again to the next deadline, which is in May when the debt ceiling issue is coming up again. And then there will be another threatened calamity. But in the unlikely event that this sequester goes ahead, we will be reducing funding for many programs that should not be cut, but doing nothing to get at the waste and duplication and inefficiency and all the other things that give government a bad name.

GAZETTE: Do you envision any movement, or any kind of real compromise with such a divisive government?

BILMES: The overwhelming majority of Americans of both parties want compromise, according to the Pew and Gallup polls. But many of the congressional districts have been so gerrymandered that the districts are representing either extremely liberal or extremely conservative electorates, and this has made it very difficult to achieve a consensus.  Many of the newly elected members of Congress [whom] we teach here at the Kennedy School are more worried about challenges from within their party in the primaries than they are about facing the opposite party.  This political redistricting has created a pernicious problem. It is becoming more and more difficult to achieve consensus even on subjects like reducing the national debt or raising taxes on the wealthy, where you have a pretty high degree of consensus among the voters.

GAZETTE: Why is the budget process so broken?

BILMES: The budget process in this country has become completely dysfunctional.  It’s broken down, for several reasons. Partly because of the congressional polarization, partly because budget reform is not glamorous — it’s not a headline-grabber — it requires a lot of time and attention to detail to fix it, and partly because it has been easier to open the federal checkbook than to work out how to get better value for what we already spend.

The public is exasperated, not only in the U.S., but around the world, with this crises-driven budget situation. My foreign students are astonished that we put up with it. When you read the budget theory by scholars such as Aaron Wildavsky, budgets are supposed to help with allocation of resources, setting priorities, planning, and management. The current budgeting system at the federal level doesn’t facilitate any of those things.

What happens now is that Congress appropriates money through stopgap measures, the so-called continuing resolutions. So thousands of people across the government spend all year preparing very detailed estimates on what it’s going to cost to run their programs, and Congress effectively ignores all of that and just Scotch tapes together something from last year. Congress has enacted more than 75 of these continuing resolutions over the past decade.

At the same time, a lot of money is spent through the so-called emergency appropriations, which are supposed to pay for actual unforeseen emergencies like hurricanes. But Congress has appropriated trillions of dollars for Iraq and Afghanistan through this emergency-appropriation mechanism. The problem with this is that the emergency money, which is designed to get out the door very quickly for something like a hurricane, is subject to far less scrutiny than a regular budget bill. And it circumvents all the budget caps.

The combination of the lack of budget discipline in Congress, the fact that it has been relying on the continuing resolutions and the emergency appropriations, and the fact that it has been so easy to go to the debt markets and borrow, means that the budget process is no longer functioning as it is supposed to. The sequester is simply the latest manifestation of this problem, which I think can only be solved by a fundamental overhaul of the budget system, which hasn’t been reformed in a major way since 1974.

GAZETTE: What can be done to fix it?

BILMES: There are a number of reforms that would be helpful, but here are three key areas that we should consider:

The quickest and easiest way to improve this is to create an annual budget less often.  One way is to move to biennial budgeting. The annual process wastes a lot of time and effort, and it increases the cost of government services. Federal agencies don’t have the leverage of negotiating long-term deals, and then they rush to spend money in the last weeks of the year, usually on lower-quality items. Most government programs — National Parks or weather forecasting or food inspections or whatever — need continuity to function effectively.

The annual budget charade undermines employee morale because so many federal workers spend so much time on a process that doesn’t work. (I write about this in my book “The People Factor: Strengthening America by Investing in Public Service.”) And to make this reform work, we need to restrict the use of continuing resolutions to very unusual circumstances, and the use of emergency money should be limited to actual emergencies.

The second area of reform is to upgrade the actual framework for budgeting and accounting, which means our ability to look at where the money is spent. Right now, the federal budget is simply a massive list of salaries and expenses. It’s not the kind of budget where you can see how much money gets spent on different activities.  All of the indirect layers of costs are embedded in the budget, and they are buried in thousands of line items of details. When I was trying to understand the costs of the Iraq and Afghanistan wars for my book “The Three Trillion Dollar War: The True Cost of the Iraq Conflict,” I found that it was extremely difficult to unravel and figure out where money is spent, because it is not set up in a transparent way.

The private sector as well as a number of U.S. local governments use what’s called “activity-based” costing.  This is a method that transposes budget expenditures so it becomes possible to see, for example, all the direct and indirect costs associated with promoting small businesses across the entire government. But because we lack

this kind of visibility on the federal budget, or the right tools, we are considering untargeted, across-the-board cuts that don’t distinguish between the fat and the bone. The sequester is the opposite of what we should be doing.  We should be analyzing where the money is spent so that we can prioritize and cut lower-priority overheads and inefficient spending.

Third, the congressional budget process needs to be reformed. It’s difficult to get visibility on spending because in the current system the authorizing committees control mandatory spending, such as entitlement programs, by setting the formula for receiving these benefits. The appropriations committees control the so-called discretionary spending. There are dozens of subcommittees and sub-subcommittees fighting over turf and jurisdiction. Congress spends money both through appropriating directly but also by providing tax deductions. There is no coherent system for viewing all these expenditures together as a whole. Instead, the committees fight over what are essentially arbitrary allocations of the total pie, and even then Congress can circumvent these allocations.

GAZETTE: Can President Obama do anything to fundamentally change the budgeting process?

BILMES: Traditionally, the impetus for budget process reforms has emanated from the Congress or from the Congressional Budget Office, the GAO [Government Accounting Office], and think tanks. I think the president would be supportive of anything that restores budget sanity. But you need to have support from the whole establishment that works in the budget process, that’s frustrated by it, and that really understands it, to get momentum for budget reforms. The best thing the president could do is to set up a bipartisan commission to look at reforming the budget process.

GAZETTE: What do you consider the most important first step?

BILMES: It’s important that the federal government take a first step that can succeed, and that has bipartisan support. A good one would be to improve how we do capital budgeting, which is long-term budgeting for infrastructure and capital equipment.  This would help the government do a better job of planning for short-term and long-term expenditures.  State and local governments already do this pretty well, with strong systems in place to plan ahead, prioritize, and consider how they are going to finance these projects. That alone means that there is a pool of talented civil servants in the states and municipalities who could help the federal government do a better job with capital budgets. The federal government does very poorly with this.

A number of my former students, who are now working in the federal government, are enthusiastic about the prospects for capital budgeting and even activity-based budgeting. I get emails practically every week from former students who are working somewhere in government, saying that they are trying to do these things. A new generation of public servants coming out of the Kennedy School has been trained in some of these techniques and is already making a big difference in state and local government budgets around the country. So the next step is for them to [hold] more senior positions in the federal government so they can begin improving the budget system at the national level.