Well, it happened. The big bad sequester went into effect and guess what? The earth is still rotating on its axis. Planes are still flying, the Coast Guard is still patrolling U.S. waters, and there haven’t been any mass breakouts from federal penitentiaries. On Wall Street, the Dow closed up thirty-five points, leaving it just seventy-five points below its all-time high. Outside of the public sector and the media bubble, I suspect, many Americans greeted the whole thing with a yawn—just more Washington squabbling about the budget.
That’s not really accurate, though. As President Obama pointed out during an extended appearance at the White House press room on Friday, the budget-cutting process that the sequester mandates is “going to hurt. It’s going to hurt individual people, and it’s going to hurt the economy overall.” For many federal workers, such as civilians employed at the Pentagon and employees of the Justice Department and other agencies, it will mean furloughs and lower pay. As these folks see their incomes drop, they will spend less on all sorts of things, which will have an impact on countless businesses in the private sector.”
But for a while, at least, most Americans probably won’t notice much difference in their lives, and that’s one reason I think this thing could go on and on. Until very recently, the assumption in Washington was that the sequester would go into effect but not for very long: sometime between now and the end of the month, the two sides would come to an agreement on funding the federal government, and as part of that deal they’d resolve their differences about spending cuts and revenue increases, and send the sequester to the history books, where it belongs. But such a resolution is looking increasingly unlikely. In baldly ruling out any revenue increases whatsoever, as he did again Friday, Speaker Boehner has preëmptively torpedoed any negotiations.
Right now, it looks like Republicans in Congress will agree to fund the government while leaving the sequester in place, giving President Obama little choice but to go along. At that point, we will be locked into an extended game of chicken. Such a standoff could continue for much of the summer, until the looming expiration of the debt ceiling—and the associated risk of a financial meltdown—forces a compromise. When will that happen? As part of the fiscal-cliff deal at the start of the year, the debt-ceiling expiration was put off until May 18th. As happened in 2011, the Treasury Department, through creative cash management, could almost certainly keep the government operating for two or three additional months beyond that date, which would take us to mid-August.
If you think this sounds like alarmism, ask yourself a couple of questions: How likely do you think it is that, between now and March 31st, the Republicans will soften their stance on raising taxes by eliminating some loopholes and deductions? And if they stick to their hardline position, how likely do you think President Obama is to drop his calls for a “balanced” approach to replacing the sequester, and to agree to a package of spending cuts without any revenue increases? In my view, the only plausible answers to these questions range from “not very likely” to “not a snowball’s chance in hell.” Although both sides claim not to like the sequester, neither one dislikes it enough to pay the political price that would be involved in bringing it to an end. In fact, while few people in Washington would ever admit it publicly, letting the sequester go into effect for a while holds attractions for both sides.
For Republicans, it gives them the long-awaited opportunity to show their chops as a party primarily intent on cutting the size of government and keeping taxes low, particularly for the wealthy. To be sure, some prominent party figures, such as John McCain and Lindsey Graham, are chafing at cutting the defense budget. But in today’s G.O.P., particularly the House G.O.P., the slash-the-government crowd outnumbers the protect-the-Pentagon faction.
For Democrats, the sequester is another chance to portray the Republicans as nutty extremists intent on protecting their rich donors. In addition to being not very far from the truth, this strategy has the additional virtue of being believed by most of the electorate. It worked for Obama in last year’s election, it worked during the debt-ceiling standoff, and it is working in the current dispute. A recent poll from Pew Research suggested that forty-five per cent of Americans would blame the Republicans if the sequester went into effect, and thirty-two per cent would blame the President.
If this analysis is right, and both sides have decided that it is in their interest to let this thing play out, the odds of an early resolution are slim to nil. And the question then becomes: What could happen to change the political calculus? As far as I can see, there are two possibilities, neither of which appears imminent: a big shift in public opinion, or a crisis in the markets.
Should the sequester stay in effect for more than a few weeks, members of the public will start to notice cutbacks in the federally financed services they care about, like special-ed classes, after-school programs, and meals for senior citizens. There will be media reports about poor kids being sent home, or turned loose on the streets; F.B.I. agents cutting back on investigations because they are working a four-day week; soldiers going hungry, or being forced to cook their own meals, because Defense Department civilians have been furloughed. Even those people not directly affected could get angry. Alternatively, though, things could go the other way. Many Americans agree with the Republicans that the federal government is inefficient and bloated. Having seen their own employers cut back and retrench, they may be quite willing to watch Uncle Sam go through the same process. Public outrage is not a given.
As for the markets, they have largely ignored what’s been happening in Washington. That may be partly because investors have been assuming there would eventually be an agreement, but it also reflects growing confidence in the ability of the economy to weather the sequester. The headline figure for the spending cuts in the remainder of 2013 is eighty-five billion dollars. However, partly because of delays between appropriations and spending, the Congressional Budget Office reckons that the actual reduction in outlays will be about forty-five billion dollars, which is only about a quarter of one per cent of G.D.P. By itself, a shock of his size is hardly likely to sink the economy.
That’s the optimistic interpretation. Nothing is certain, though. The longer the standoff continues, the greater the risk that investors will once again start to lose faith in the political system. Sentiment could change rapidly. One of the big ratings agencies could downgrade U.S. debt. Just yesterday, a senior official at Fitch told Bloomberg News raised such a possibility, saying a repeat of the 2011 debt-ceiling fight would be inconsistent with the U.S. retaining a triple-A rating. Even the possibility of such an outcome could produce a sell-off in the markets. And in my experience, there’s nothing as effective as a tumbling Dow in forcing Washington politicians to bury their differences.
However it is eventually resolved, I can’t see it happening very soon. In the meantime, the “dumb” sequester—Obama was right about that, too—will still be with us.
Photograph by Pete Marovich/Bloomberg/Getty.
