Is Secretary Hagel Crying Wolf?

Defense Secretary Chuck Hagel’s letter to the Senate Armed Services Committee yesterday summarized the “draconian impact” that the Pentagon estimates a Fiscal Year (FY) 2014 sequester would have on America’s national security. The letter and accompanying “Contingency Plan” aren’t news.

Almost every analysis of the impact of an FY 2014 sequester on defense confirms the secretary’s concerns. Indeed, most analysts believe that the FY 2013 sequester was ill-conceived and counter-productive for defense and non-defense discretionary accounts, alike.

As we wrote in our report, Indefensible, the sequester option is simply the worst option at Congress’ disposal to reduce deficits and debts. The same findings (summarized in this report) emerged from joint hearings sponsored by the Bipartisan Policy Center, the Center for Strategic and International Studies, the Concord Coalition, the American Business Conference, and four academic policy institutes.

The sequester caps for FY 2014 combine to $967.4 billion for defense and non-defense budget authority, with some additional reductions coming from mandatory programs that are not explicitly exempted from the across the board cuts. If Congress adheres to the triggered sequester caps (originally set forth in the Budget Control Act of 2011), both categories of spending will suffer a $54.7 billion reduction. While no institution has yet summarized the impact of such a sequester on non-defense accounts, it is reasonable to assume that many federal domestic programs would find it difficult to fulfill their missions under the FY 2014 cap.

Our expectation, and hope, was that the local impact of the FY 2013 sequester would provide sufficient motivation for individual members of Congress to overturn the sequester and attack the real issues driving U.S. debt projections—entitlement spending and a counter-productive tax code.

So far, no substantial motivation seems to have been generated from the folks back home. With the August recess looming, it is fair to ask whether Congress will hear enough horror stories in their states and districts that pressure builds for a real budget deal.

With few hopes of individual FY 2014 appropriations bills, another sequester on some mandatory programs beginning this October, and the October or early November exhaustion of Treasury’s “extraordinary measures” necessary to pay the nation’s bills on time and in full, Congress could make a “global settlement” of fiscal issues. Combining tax reform, debt ceiling extension through next year, and a compromise on FY 2014 appropriations and the sequester could lead to legitimate progress on long-term indebtedness.

Recent history suggests that Congress will not take advantage of this opportunity in the fall. It may be, however, that congressional leadership will recognize that putting in place an FY 2014 sequester and then trying to repeal it in the middle of an election year has a significant political downside.

While we may remain among the few in town who hold out some hope for real progress in entitlement and tax reform, we have to admit that our odds are much, much less than 50-50. We wonder what it will take for Democrats and Republicans, joined by the White House, to recognize the damage being done to federal programs and national security.

Fiscal matters seem to be moving from merely stupid to potentially dangerous.