We are fast approaching March 1, Sequestration Day — the moment when $85 billion worth of federal money will suddenly be put off limits for spending by federal agencies as a consequence of the failure of the Congress and the president to come to agreement with respect to where individual cuts should be made. Will the result be catastrophic in its impact on government services or salutary in its impact on government debt?
The answers are probably yes to the first question, almost certainly no to the second.
Start with the Department of Defense. There are certainly many places where cuts in the DOD's budget could produce savings, but brute force across-the-board cuts are not the way to achieve them. The sequester could affect as many as 11,000 people in Utah, resulting in $86 million in lost wages while degrading efficiency at Hill Air Force Base in a way that would cost the government millions more. Hill is just one of many military facilities spread across the country; add them all up and we are soon talking billions. While it is true that some of the scenarios we are hearing about concerning how drastic the effects of sequestration will be are more calculated to affix political blame than to describe what's likely to happen, there is no question that there will be costly side effects that will reduce any savings the sequester might produce on paper.
Will it really happen? Yes, I think so. But I hope its effects will be short-lived. Here's why.
The timing of the cuts could be bunched into the last few months of the year, buying time for Congress and the president to negotiate a new deal to avoid sequestration altogether. That's what most Washington observers expect will happen. However, it won't prevent the whole exercise from being expensive. Already the hidden costs of sequestration are making themselves felt.
Managers of the various federal agencies have been living in an atmosphere of uncertainty for months: Will we be cut or not, and if so, by how much? As a consequence, they have postponed contracts, put various projects on indefinite hold and spent lots of management time drawing up furlough plans for their employees. This has lowered morale and disrupted existing work schedules, producing low productivity, the costly but inevitable byproduct of uncertainty. It has not only reigned all across the government but also been passed into the private sector.
Companies that supply the government with goods and services have been forced to put everything on hold until they find out what is going to happen. They have delayed placing orders with their suppliers and laid off some of their employees. The ripple effect of all this has meant higher costs within the affected companies (which means lower tax revenue from them and their employees) that match the higher operating costs within government. Even if sequestration doesn't happen next Monday, a significant price in unproductive effort has already been paid. Will the cost reach $85 billion? No way to know for sure, but it is certainly possible.
The entire political debate has been over whose fault it will be if sequestration happens, when it should have been over how much net savings it would produce. If that had been the case, the whole idea would have been quickly dropped.
When using a meat axe where a scalpel is called for, it's all pain and no gain.