Hurtling Back to the 1970s

Tie dye T-shirts were the rage in the 1970s, which is where federal spending levels will return unless Congress acts to prevent automatic budget cuts from going into effect.Tie dye T-shirts, bell bottoms and the risqué mini-skirt were swell in the early 1970s. Many wish we could go back to those fun and revolutionary times, and that may be what the federal government winds up doing with its budget process called sequestration.

Last Friday, the Obama Administration provided the skinny in an anything-but-skinny 394-page document detailing how agencies would implement $109 billion in automatic cuts scheduled for January 2 — unless Congress enacts a budget bill before then, which is growing politically more unlikely by the day.

If the full sequestration is implemented over the next 10 years, domestic discretionary spending in 2014 would be capped at 1970 levels. Then it would precipitously fall through 2021 to 2.5 percent of GDP, which doesn't sound so groovy to a lot of folks, including economists who warn spending cuts of this magnitude this suddenly could thrust the U.S. economy back into recession.

After painting itself into a corner, Congress forced Obama to compile the report that outlines automatic cuts for FY13, which would reduce spending across more than 1,200 federal accounts, trimming defense by $54.67 billion, domestic discretionary spending by $38 billion, Medicare by $11 billion and other mandatory spending programs by about $5 billion.

The report estimates the reductions would reduce discretionary defense spending by 9.4 percent and domestic discretionary spending by 8.2 percent in FY13. Medicare would be reduced by a maximum 2 percent as required under the August debt limit increase law.

The looming spending cuts are freaking out many different constituencies in the country and the situation could get worse. With the defense community already engaged on a campaign to offset defense cuts, domestic programs could be under added pressure to make up the difference.

Jeepers Creepers — How Did We Get Here?

When federal lawmakers agreed to last year’s debt limit law, they established the Joint Select Committee on Deficit Reduction. The so-called super committee was tasked with finding at least $1.2 trillion in savings through spending cuts or increased revenues. Because the super committee was unsuccessful, across-the-board spending reductions of $1.2 trillion will be automatically triggered in January 2013 through a process known as “sequestration.”

Republicans and Democrats are scrambling to avert automatic cuts to defense and non-defense programs. Both parties desperately want to avoid the scheduled cuts, but they are far apart on alternatives. Democrats say that raising revenue (tax increases) would have to be part of a solution, while Republicans generally support only reductions in spending. The sequestration won't be stopped unless the Congress and the President agree on a plan to deal with the deficit.

If the White House and congressional leaders can't compromise, $1.2 trillion in spending cuts will go into effect automatically, which could plunge the nation back in recession.Will This Really Happen? Don't Have a Cow Man.

The report prepared by the Administration gives stakeholders a grim, clear picture of the damage inflicted on domestic and defense programs. We expect the report will help interest groups to quantify the impacts locally and put pressure on Congress to find a better, more funky solution.

However, there is no chance of solving this far-out problem before the November election. The presidential campaigns and members of Congress running for election are already mixing it up over the report. Obama says the cuts would be devastating to the economy. His GOP challenger Mitt Romney charges the country is in budget soup because of Obama's failure to lead. Republican and Democratic congressional leaders have swapped charges of who is to blame.

Meanwhile, there are some awkward cuts in the sequestration report, including a $129 million reduction to U.S. embassy security overseas.

When Congress returns for a lame duck session later this year, a vast army of groups will converge on the Hill for one of the most epic battles in years. With billions of dollars on the line, it's likely Congress will chill out and come up with a short-term fix. That will allow the new Congress and the winner of the 2012 presidential election to wrangle on a more long-term solution to our country's gnarly budget problems.