Let Sequestration Happen

The Skeptics

Some members of Congress are anxious to undo sequestration, ignoring the inconvenient fact that they created the process in the first place. Instead of accepting responsibility, they are proposing legislation that would force the White House to outline the effects of the cuts. And people wonder why Congress’s approval rating is at an all-time low.

But there is more than enough blame to go around. The Republican-controlled House, the Democratic-led Senate and the Obama White House had a chance to implement a range of proposals aimed at deficit reduction last summer. They chose to kick the can down the road, empowering an independent, bipartisan panel to make the tough choices for them. That effort failed.

If the Super Committee was unable to hammer out a compromise when the conditions were ripe last summer, it is unlikely that one will materialize this summer. Sequestration may be the only way to achieve real spending cuts. Let’s let it happen.

To be clear, sequestration is not the best way to cut the military budget, or federal spending overall. It wasn’t supposed to happen at all; the threat of spending cuts was supposed to compel the various parties to reach a compromise. But it may be the only feasible way to cut spending. And it isn’t going to get any easier in the future.

The Democrats are beginning to show their hand: this was never about cutting spending; it was always about raising taxes. Sen. Patty Murray explained yesterday that her party would allow the cuts in defense and nondefense spending to go forward, and the Bush tax cuts to expire, if Republicans didn’t agree to tax hikes on the wealthy. That isn’t likely to happen, and not just because the GOP is being stubborn. A sizable majority of Americans, Republicans and Democrats alike, are in favor of cutting military spending. More than half want to extend the Bush tax cuts for all.

Still, there are some Republican politicians who always have been willing to raise taxes in order to protect the Pentagon, despite what the public says it wants. I don’t fault Democrats for holding Pentagon spending hostage as much as I fault Republicans for allowing themselves to be maneuvered into a corner.

The GOP has a straightforward way out of the box: allow the defense and nondefense cuts to go forward, refuse a tax increase and renegotiate a debt reduction deal that doesn't leave entitlements—the real drivers of our long-term fiscal calamity—off the table.

Sequestration likely won’t be as bad as special interests and those in favor of ever-increasing military spending claim. The reductions would only apply to FY 2013 budget authority, not outlays. The Pentagon and Congress will then have greater flexibility starting in FY 2014 to adjust the reductions under the BCA spending caps. In the meantime, many programs could continue on funding already authorized.

We also must keep the cuts in proper perspective. The DOD base budget under sequestration would total $469 billion, about what we spent in 2006, not exactly a lean year for the Pentagon. And as for the claim that the military cuts will result in perhaps one million lost jobs, that seems implausible considering that the cuts would amount to less than three tenths of 1 percent of GDP.

More to the point, the defense budget should never be seen as a jobs program. In a dynamic, market economy, capital and resources adjust to changing demand. Some regions and municipalities that are relatively more dependent upon military spending might suffer some short-term effects, but there is evidence that economies reliant on the military can recover. Some regions could emerge stronger and more diversified. Other reporting indicates that some businesses are already positioning themselves to weather reduced government spending.

Americans spend more today on our military—in real, inflation-adjusted terms—than during the high point of the Reagan buildup. Some might justify these expenditures by claiming that the world is much more dangerous today. But the evidence for that is pretty thin. The Soviet Union on its worst day could do more damage in a few minutes than Al Qaeda has managed to inflict in over a decade. We are safer than most politicians are willing to admit.

If they embraced our good fortune, policy makers could cut military spending without undermining U.S. security. Shifting resources from a relatively unproductive and inefficient sector to a more productive one would be good for the economy. And lower military spending could even improve our foreign policy.

It simply isn't fair to saddle fewer troops with more missions. If we cut spending and reduced the size of the U.S. military, policy makers would have to be more discriminating in the use of force. But greater restraint by the United States would encourage other countries to take responsibility for their own security and share in the costs and risks of policing the global commons.

Strategic spending cuts informed by a realistic assessment of today’s threats would be ideal. Sequestration may not reach this ideal, but it may be the only way to achieve actual cuts in military spending.

Image: iStockPhoto

TopicsCongressDomestic PoliticsDefensePublic OpinionThe PresidencyPolitical EconomyPolitics

The Silly Season of Politics

The Buzz

You know you are in the silly season of politics when a Mitt Romney goes to the NAACP convention, gets booed for vowing to repeal “Obamacare,” and the media, ignoring that he also got a standing ovation, go wild with speculation on whether the GOP presidential candidate actually wanted that to happen so he could cadge anti-black votes. 

A Daily Beast writer, to use one example, speculated that Romney and his people felt “that a little shower of boos was perfectly fine because the story ‘Romney Booed at NAACP’ would jazz up their (very white) base.”

It’s difficult to know just how to respond to such commentary, but the Washington Post’s Kathleen Parker hit upon a worthy approach and just the right tone when she conjured up an imaginary conversation “in a Very Secret Meeting” between Romney and an aide:

“Mitt, you know, there’s one demographic we’re worried about.’’

“What’s that, Stu?”

“Well, sir, the Aryan Nation. Their votes? Hanging from the precipice, sir. We have to reel them in.”

“Holy moly, Stu, but how?”

“I have a plan. When you speak to the NAACP next week, we’re gonna have you say ‘Obamacare.’ You’ll get booed, of course, but no Aryan will vote for Barack Obama, I can promise you that, sir.”

“Jumpin’ Jehoshaphat, Stu, that’s sheer genius! But won’t the liberal media figure it out? Won’t they see our plan?”

“With all due respect, sir, don’t be ridiculous.”

Parker goes on to say that Romney vowed to repeal Obamacare because that’s what he always says. And the term Obamacare has become pretty standard political language, used by journalists, columnists, even Democrats. She wonders: “What would the word-parsers have said if he had adjusted his message to be more palatable to a crowd from which no one expected more than basic civility? They would have said he was a deceiver, a shape-shifter, a manipulator and a dishonest broker.”

Parker concludes: “What kind of dogs are they whistling to, one wonders? Trying to stoke the rage of all those ‘very black’ or ‘very Latino’ Mormon haters?”


Sequestration: It’s Not That Bad

The Skeptics

Sequestration, the automatic budget cuts scheduled for January 2013, looms large over Washington, and it seems that almost everyone wants it to go away, Democrats and Republicans alike. The epitome of sequestration doomsaying is a recent comment by the chairman of the House Armed Services Committee, Rep. Buck McKeon (R-CA). At a May 31 dinner honoring the congressman, he claimed that sequestration was an existential threat, warning that it “will do what the Soviets exhausted themselves attempting. It will do what countless tin pot dictators, ideological madmen, and ruthless suicide bombers have failed to do.”

There’s fantastic irony in making such a statement after receiving the Eisenhower Award, given each year by the National Defense Industrial Association (yet more irony). They are either unaware of or ignore the fact that, at the height of the Cold War, President Eisenhower cut defense spending by 27 percent. Nevertheless, McKeon’s statement and others like it are simply attempts to scare us into believing that sequestration means a ravaged defense budget and a weakened economy. It’s not that bad.

In reality, sequestration means that we will have roughly the defense budget of 2007, when spending (in real terms) was at its highest since the apex of the Vietnam War in 1968, a more dangerous time for Americans than 2012. Furthermore, we can spend less on war as we have withdrawn from Iraq and continue to withdraw from Afghanistan. Some point to the need to reset the force after a decade of war. To a certain extent, that may be necessary. But before we recapitalize, we should think about what we’re resetting for. A post-sequester budget would certainly be big enough to protect Americans, but our leaders should take this opportunity to make long-neglected choices about our national security interests abroad.

Some complain that sequestration doesn’t allow for those choices because it slashes all programs indiscriminately. However, across-the-board sequestration affects budget authority, not outlays, and occurs only in FY2013. From FY2014 through FY2021, spending caps enforce budget limits. So, even though the initial cut will be broad and blunt, most programs will survive on previously appropriated funds until 2014, when the Pentagon and Congress will have greater flexibility to tailor reductions under those caps.

Another worry is that sequestration will further increase unemployment and damage the industrial base. Recent reports claim at least one million jobs will be lost (over two years) and GDP will suffer. A closer read of those reports reveals that the majority of those supposed losses would be private sector jobs, many of which are not directly related to the defense industry. It is far from certain that local retail, restaurants, or even many contractors will lay off workers or close up shop, especially if they are allowed to keep the taxes they are currently spending on the bloated defense budget.

During the significant defense drawdown of the 1990s (36 percent), when taxes went up, the economy not only survived, it flourished. Unemployment did initially rise from 5.4 percent in 1990 to 7.3 percent in 1992. But by 1995, it had dropped to 5.6 percent, and by 2000, it was 4 percent. Meanwhile, GDP grew from $5.7 trillion in 1990 to $9.8 trillion in 2000. The answer for those who say, “Yes, but there were other factors involved in that growth!” is, of course, “Exactly!” It is extremely difficult to predict the effects of cutting inefficient government spending equal to three-tenths of one percent of GDP per year in an economy so large that Americans can spend $110 billion every year on fast food alone. While some regions heavy with defense industry will indeed feel some effects, history has shown that those areas can and have recovered in a relatively short time.

As legislation goes, sequestration is awful. But it is not the end of the world; it is not the end of the United States; it is not even the end of the defense industry. It is merely a symptom of a long-approaching budgetary reckoning and a symbol of Congress’s cowardice. If it’s as bad as McKeon fears, we are facing no less than the combined cataclysm of invasion, metropolitan destruction and foreign domination. Thankfully, it’s not that bad.

TopicsCongressDefensePolitical EconomySecurity

The Free-Market Deficit

Paul Pillar

Debates in the United States over the economy, government and business tend to be viewed as one between free marketeers on the Right and government interventionists on the Left. As Arthur Brooks, president of the American Enterprise Institute, puts it at the outset of this week's edition of the Washington Post's “Five Myths” feature:

The 2012 presidential campaign is shaping up to be a battle of two economic philosophies. One favors a greater redistributive and regulatory role for the government; the other prioritizes the values of free enterprise, including private property, individual liberty and limited government.

It is appropriate to view some issues of public policy this way. Some people, who are found more on the Left than the Right, believe that even a smoothly operating free market does not meet all important public needs. There may be, for example, tragedy-of-the-commons phenomena that lead to unacceptable environmental degradation, to which an appropriate response is government-introduced incentives that lead the market to operate in a less destructive way. There may be other social needs, such as safety nets for the disadvantaged, to which the favored response might be not a tilting of market incentives but instead a circumvention of the market with governmental programs. Of course other people, found mainly on the Right, have different views about such issues.

In looking around at what is wrong with our crisis-generating, inequality-accentuating economy, however, one finds far more instances in which there is not enough of a free market than of ills flowing from a free market's unfettered operation. Brooks gets to this point when he identifies as his fourth myth to dispel, “The free market caused the financial meltdown.” Actually, says Brooks, “It wasn't free enterprise that was at fault; it was the lack of free enterprise.” He's right about that, although in his zeal to indict government he quickly narrows his description of the problem. “Statism and its co-dependent spouse—corporate cronyism—melted down our economy,” he says, pointing to the housing bubble and the role of government-chartered Fannie Mae and Freddie Mac.

That sort of codependence is indeed part of the problem, and one could find glaring examples of it in, say, the military-industrial complex. Another example that recently came to light through investigative journalism of the New York Times is a privatized system of halfway houses in New Jersey, run by a firm with close ties to the state's governor, Chris Christie. The halfway houses are houses of misery with awful supervision and resulting rampant drug use, gang violence and frequent escapes. As Paul Krugman, someone who approaches most political and economic issues from a much different perspective than Arthur Brooks, has observed, one thing companies like the one running the halfway houses

are definitely not doing is competing in a free market. They are, instead, living off government contracts. There isn't any market here, and there is, therefore, no reason to expect any magical gains in efficiency.

But government-contractor cronyism is still only a piece of the problem. The deficit in free markets is found in much else of the private sector, where there is no governmental angle at all. The myth involved here is that a private sector untrammeled by government interference equals a free market. It doesn't.

Take, for example, the compensation of corporate chief executives. CEO pay in the United States is vastly inflated, by any of several measures: by how much it has increased over the years, by comparison with pay throughout the same enterprises, by comparison with pay for CEOs in European corporations, by comparison with pay for senior executives in government and just by contemplating the value added by any one person, even the one in the top job. If we had a free market in CEOs, the pay of most of them would be much lower. Those are, after all, highly desirable jobs. For every CEO who is pulling down $10 million annually, there are probably several comparably talented executives who would love to have the position, would run the company just as well and be willing to do the job for a mere, say, $3 million. But there is nothing close to a free market in CEOs. Instead, what passes for corporate governance in much of the American private sector involves self-perpetuating structures led most often by an executive chairman.

A few months ago I attended a forum, oozing with a free-market ethos, in which the dominant theme of the speakers was the unwisdom of government interference in the private sector. Another member of the audience had the temerity to raise an issue about CEO pay along the lines of what I just mentioned. The response from the stage was, “Well, if a company gets the right person, those several million dollars aren't going to be very important.” When the questioner shot back that this assumes there is only one “right person,” the moderator changed the subject.

The departures from a free market often take the form of assuming there is only one “right” something—a CEO, an investment bank, a management adviser. At least as often the departures are a simple matter of control and exclusion. This is frequently the case in the financial sector, the portion of the American economy that is most bloated and parasitic and that attracts a disproportionate amount of young talent for the same reason that Willie Sutton robbed banks: because that's where the money is. Never mind for the moment the corruption of free markets that involves outright illegality, a new instance of which seems to arise nearly every week—including insider trading and, in the most recent story, the manipulation of Libor. Many bushels of money are made legally not by someone providing a superior product or service in competition with other providers but instead as a function of special access to assets, high barriers to entry by would-be competitors and manipulations too complicated for others—including not just the public but even would-be government regulators—to understand. These factors, especially the last one, had at least as much to do with the recession-precipitating financial meltdown as the government-chartered status of the giant mortgage companies.

The politically driven attention to Bain Capital has provided another window into the deficiency of free markets in the financial sector. The deficiency goes beyond the general respect in which the private-equity game (other than the part that involves venture capital helping to get start-ups off the ground) is itself a testimonial to a deficiency in free markets and to how players in the game are positioned to do things that John Q. Investor cannot. Where exclusion and an absence of competition became a surefire moneymaker for Bain was after it took control of a business, when it could then use that control to milk fees from the company no matter how well or poorly it was doing. As one description in the Times puts it:

Bain structured deals so that it was difficult for the firm and its executives to ever really lose, even if practically everyone else involved with the company that Bain owned did, including its employees, creditors and even, at times, investors in Bain's funds.

One example was a Michigan-based automotive supplier that sustained mounting losses for three years before filing for bankruptcy in 2000. All through this period, Bain continued to collect an annual $950,000 “advisory fee.” Over five years, Bain extracted more than $10 million in various fees from the company, while the $16 million stake that Bain's investors had in the company was wiped out. This situation is the antithesis of a free market, in which those who do better in open competition become financial winners and those who do not are losers. There was no competition for Bain's “advice.” This was instead a game of "heads I win, tails you lose."

Where government can intervene to increase the role of free markets in the economy, it should—not because government intervention is good but instead because free markets are good. The clearest example of such intervention is antitrust enforcement. Admittedly, beyond classic antitrust cases the opportunities for government to do good in this way are much harder to identify. It is one thing to go after a Microsoft or the old AT&T, in which the antitrust enforcers could count computers or telephones and make a case about a monopoly. It is something else to identify noncompetitive aspects of legerdemain in the financial sector, let alone to come up with feasible ways to do something about it.

Even if government solutions are not always obvious, let us at least be clear and honest about the nature of the issues involved. The usual way of expressing the main lines of debate, as Brooks expresses them, is incorrect. There is nothing anti–free enterprise about spotlighting and criticizing the structural inadequacies in the private sector or in favoring regulation to correct those inadequacies. To the contrary, such critics are the true proponents of free markets. The enemies of free markets are those who defend the status quo or resist any government interference with the private sector no matter what noncompetitive excesses, inequities and impediments that sector embodies.

Image: dmixo6

TopicsBankingDomestic PoliticsEconomic DevelopmentPolitical Economy RegionsUnited States

A Pragmatic President in Arabia

Paul Pillar

As outside observers try to make predictions about what Egypt's Islamists will do with their popularity and electoral successes, an additional data point arose this week with Mohamed Morsi's first foreign trip as president, to Saudi Arabia. In a way, it was remarkable that he traveled anywhere outside his country this soon after taking office, given that he is in the middle of a constitutional crisis in which he is at loggerheads with the judiciary and the military over whether parliament can meet, not to mention the huge uncertainties over his own office's powers.

The selection of a destination for a head of government's first overseas trip traditionally is taken as symbolic statement, of course, and on the surface it is unsurprising that the most populous Arab state and the most economically influential one would give priority to their relationship with each other. But there also is a long history of animosity between the two countries—leading the republican and monarchical poles of the Arab world—going back to Nasser's time and the waging by Egypt and Saudi Arabia of a proxy war in Yemen in the 1960s. The political upheaval in Egypt of the past year and a half has not helped the relationship. The Saudis were annoyed at the United States for supposedly throwing Hosni Mubarak under a bus, and anything even faintly revolutionary in their part of the world makes the rulers of a medieval family-based political structure nervous. The overlap of Islam and politics that characterizes both the Saudi regime and Morsi's Muslim Brotherhood represents more of a disjunction than a common thread between them. The Brotherhood—given the path it has taken and the electoral success it has enjoyed—is a living statement that a Saudi-style structure is not necessary and that a democratic system is compatible with respect for Islamic principles.

Morsi evidently said enough to put his hosts at ease and to keep his brief visit cordial. The trip suggested that what is more important to him than anything religious (although he did perform the Umrah, or minor pilgrimage) or ideological are pragmatic considerations, especially economic ones. Saudi investment and remittances from Egyptian workers in Saudi Arabia are important ingredients in trying to come anywhere close to meeting Egyptians' inflated economic expectations. There also is a wider foreign-policy dimension to the trip. Despite much talk lately about how an Egypt under Morsi rather than Mubarak will move toward better relations with Iran, the trip demonstrated that Iran is not Morsi's first choice of partners among competitors in the Persian Gulf. A further pragmatic consideration was no doubt involved here, too, with an awareness of how dyspeptic Washington would get over anyone improving relations with Tehran.

All in all, it is hard to see how anything about the trip would have been different if it had been made by an Egyptian leader not labeled an Islamist and not having “Muslim” in his party's name.

Image: Jonathan Rashad

TopicsEconomic DevelopmentIdeologyReligion RegionsEgyptIranSaudi Arabia