What the Heck is Sequestration?

The United States Congress, in their infinite wisdom, created a scenario that was supposed to force lawmakers to tackle our nation’s debt.  The scenario: create a fiscal situation that was perceived as so unbearable, lawmakers would have no choice but to act.  Unfortunately, hyper-partisanship is the rule in Washington, so our elected officials never came to an agreement as to how to proceed.

 

This all started back in 2011, during the ‘Debt Ceiling’ fight.  Republicans stated that they would not agree to an increase in the nation’s borrowing limit unless it was accompanied by an equal amount of spending cuts.  That stance lead to a stalemate in negotiations, lots of posturing by the two parties, a 600+ point dip in the Dow Jones Industrial Average, and a downgrading of America’s credit rating by Standard & Poor’s.

At the last minute, the two sides hashed out a compromise in the form of The Budget Control Act.  Enacted on August 2^nd, 2011, the law increased the debt ceiling, as well as added some obscure mechanisms for increases later (which weren’t used).  It also attempted to tackle the nation’s debt, requiring spending cuts equal to the approved debt ceiling increase (what Republicans wanted), but spread out over 10 years (more palatable to Democrats).

 

It also established the Joint Select Committee on Deficit Reduction – the so-called “Super Committee” that would be tasked with finding $1.5 Trillion in additional deficit reduction over the next 10 years.  If the committee and Congress failed to achieve these reductions, Congress would be allowed to increase the debt ceiling again by $1.2 Trillion – but this would trigger automatic, across-the-board spending cuts of $1.2 Trillion would go into effect on January 2^nd, 2013.

But wait, there’s more!  Since the Super Committee couldn’t agree on ANYTHING, the Budget Control Act had provisions that shifted the across-the-board cuts to focus more on the Department of Defense – a sacred cow for the GOP.  The provision was intended to force Republicans to be more open to additional revenue options as a part of an overall solution.

You may remember that in December, there was a battle over the Bush-era tax cuts… again.  They were supposed to expire in 2010, but were extended for 2 years due to the fear that their expiration would hurt the still-fragile economy.  This time around, however, President Obama and congressional Democrats insisted that top earners should revert back to the Clinton-era tax rates.  Republicans initially balked at this, but after polling revealed overwhelming support for the President’s stance, the GOP backed down and allowed rates to increase on those making over $450,000 a year.

 

Also buried in the tax deal was 2 month reprieve from Sequestration, since no one had time to deal with it during the election.

 

Which brings us to today…

The automatic spending cuts are scheduled to take effect on March 1^st.  Various economic forecasts show that Sequestration could reduce economic growth by as much as 2%.  That’s not good considering the economy has averaged only 1.8-2.2% growth over the past 12 quarters.  Also, the cuts to the Department of Defense could hurt employment numbers hard.  The Budget Control Act specifies that soldiers, the VA, and core programs would be exempt from the cuts, but not civilian DOD employees, intelligence employees, defense contractors; potentially hundreds of thousands of jobs could be affected.

There is a 1988 law called the Worker Adjustment and Retraining Notification Act.  It requires nearly every company in the US with more than 100 employees to give at least 60 days advance notice of mass layoffs.  Around September 2012, major defense contractors started asking if they were going to have to send out notifications to employees if they were going to lose funding due to Sequestration.  They were assured, by both The White House and Congress, that it would not be necessary.

 

It now appears that Sequestration may actually occur.  No notifications have been sent out to employees of major companies that depend on Government contracts.  The gulf between Democrats and Republicans over Sequestration continues to widen as progressive Democrats refuse to discuss changes to Social Security and Republicans refuse to discuss additional revenue.  Add into the mix the work being done on Immigration Reform, Gun Control, and Senate Confirmation hearings for President Obama’s National Security Team, and you can guess how much Congress can get done on this.

The big thing for me about all of this: The whole situation is a self-made crisis.  Congress, as has become the norm, couldn’t do its job.  This is both the fault of Republicans and Democrats.  Compromise is a four-letter word in Washington DC these days.  Partisan one-upmanship seems to be more important to lawmakers than actual lawmaking.

There is, however, one thing to note.  Almost all polling that has been done this year on Sequestration and deficit reduction shows that roughly 6 in 10 Americans agree with the Democrats and their proposals versus the Republicans.  The GOP should take note of this – they already have huge demographic and perception problems on the national level.  Policy problems won’t help matters.