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Sequestration, Political Settlement, and Effective Government

Copies of U.S. President Barack Obama's 2012 budget are unveiled on Capitol Hill.

Legislators are scrambling to avoid a government shutdown by negotiating a deal that is acceptable to a Republican House majority, Democratic Senate majority, and the namesake of “Obamacare.”  Whether this enthralling episode will end in fire or in ice (or more happily), a number of fiscal conservatives are quietly celebrating the likelihood that the so-called “sequester” will survive as the accepted spending baseline in these negotiations.  They say that this product of the bitter debt ceiling negotiations of 2011, which was originally derided as “dumb” and mean-spirited, has proven to be simple and benign.

While it’s fair to say that sequestration hasn’t brought the doom its opponents had sometimes predicted, triumphalism on its behalf is nevertheless quite misguided.  Those who think that, in spite of both parties’ reservations, sequestration is now a settled part of the law, are simply fooling themselves.  Delaying, modifying, or outright cancelling the remaining scheduled years of sequestration will be bargained over in every budget season, as has been the case recently.

Beyond the partisan wrangling and media coverage, one major issue consequence is rarely discussed: sequestration creates lingering policy uncertainty, which has real costs in terms of governance, even if they do not show up in budget line-items.

The Faults of Automatic Budgeting

Our experience with an earlier round of automatic budgeting mechanisms should remind us that they rarely deliver dependable outcomes.  Back in the 1980s, the blunt instrument designed to deliver balanced budgets through automatic cuts was the Gramm-Rudman-Hollings Act of 1985.  After its first couple years of limited bite, the result was not a balanced budget, but budget gimmickry.

The Medicare Sustainable Growth Rate provides the most vivid example of an automatic budget mechanism running aground on political reality.  The cost-capping device included in the Balanced Budget Act of 1997 put a legal limit on the growth of Medicare costs per enrollee.  If growth exceeded the prescribed limit, physician payments would automatically be cut.  Far from embracing this form of automatic budget discipline as a politically convenient way of cutting expenditures, both political parties have shown great consistency in denouncing the potential cuts to physician payments as potentially crippling Medicare.  Thus the perennial “Doc Fix,” the thoroughly bipartisan ritual by which the Sustainable Growth Rate’s mandated cuts are suspended every year.

This sort of kabuki may strike some as harmless, but it creates policy uncertainties that have real costs for those whose economic choices depend on the law.  As likely as the fixes are, doctors always face the hard-to-quantify possibility that future payments will suddenly shrink—as they did for short stretches during 2010.  That is also bad for Medicare patients, as it makes them less attractive customers, at least on the margin.

Governance Consequences of Sequestration

The problems that sequestration-related uncertainty causes for federal agencies are likewise quite severe.  Superficially simple, implementing sequestration’s cuts is actually extremely complicated because of established legal commitments with contractors and programs that cannot be sustained at all if they face a sudden cut on the order of 8%.  Those problems are likely to get more severe as time goes on, and the whole process of planning how an agency will allocate its resources becomes nearly impossible under the shadow of sequestration, especially when combined with a non-functioning congressional budget process.  Rather than addressing long-term goals, top administrators find that this constant process of having to readjust budgets forces them into a mindset of “treading water,” as NIH Director Dr. Francis Collins put it.

Although we’d all like government agencies to run as efficiently as private businesses, consider how difficult things would be for a CEO faced with a situation analogous to the one currently facing government managers.  Facing a fractious board of directors pursuing conflicting visions, you would hope to have a free hand in fashioning an adaptation strategy: flexibility to direct resources and the ability to prioritize and protect core functions (precisely what sequestration denies).  If your board finally managed to make some decisions about the course of future cost-cutting, that would be most welcome—but only if they can be believed as representative of real, lasting agreements.  However, if you’ve learned from experience that similar commitments were regularly reversed, you will be understandably reluctant to hail the announced changes as a real end to your difficulties.  Instead, the new information will be just another obstacle to planning.

This is roughly analogous to the situation currently facing government managers, both appointees and career civil servants. 

Of course, Congress’s job is incomparably more difficult than that of a board of directors at a typical public company.  Shareholders want profits.  Voters, in contrast, wish for a healthier public balance sheet at the very same time that they also demand that government provide them more benefits and collect less taxes.  Of course, these latter demands are directly in tension with the former.  Legislators have every reason to fake it—and that is what they generally do.

But replacing undependable autopilot mechanisms with durable political compromises would pay real dividends in terms of effective administration.  When agencies are given clear missions and can expect solid support, they become free to refine their operating processes and can approach the efficiency of the private sector.  The Social Security Administration is a case in point—it has a well-defined task and runs extremely smoothly.

Those who complain about inefficient government rarely consider it, but political settlement is sometimes a necessary element of administrative effectiveness.  When those same people fight to defend a mechanism that was created to be unsettling, then, they should realize the costs of doing so.

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