Sequester, the Economy and Higher Education

The following story is courtesy of Rutgers Today.

Deep federal budget cuts – known as the sequester – are set to take effect on Friday unless Congress and the president can come to an agreement to stop them. President Obama has painted a dire picture of the economic consequences if the across the board cuts go through, while Republicans have resisted attempts at a compromise that would involve raising additional tax revenue.

Professor Rosanne Altshuler, chair of the Economics Department at Rutgers, explains how the cuts came to be, what areas of the economy will be affected and what sequester means to higher education. Altshuler is former director of the Urban-Brookings Tax Policy Center and served as Senior Economist to the 2005 President’s Advisory Panel of Federal Tax Reform.

Rutgers Today: Why did Congress and the president agree to these potentially devastating automatic cuts? What were they thinking?

Altshuler:  The idea of the sequester was to say "let's come up with something so terrible that NO ONE would want to go through with it." It's like your mom saying, "if you don't clean your room you are going to have to cook for yourself as long as you live in my house." You could cook for yourself but it would be absolutely awful. You would certainly clean your room. Or so one would think.

This all goes back to the Budget Control Act (BCA) enacted in August of 2011. At that time we were approaching our debt limit and, big surprise, the Democrats and Republicans disagreed on what to do. The president and Congress decided to pass the BCA which would set up a "supercommittee" (a joint select committee of 12 members of Congress) to develop a debt reduction plan to cut $1.5 trillion over 10 years in exchange for raising the debt ceiling. The BCA established the sequester as a way to make sure the supercommittee agreed to a plan. But even with the threat of sequester, the supercommittee failed to reach a deal.

Rutgers Today: What does the sequester do?

Altshuler: The sequester triggers across the board budget cuts of $1.2 trillion through 2021, divided equally between defense and non-defense spending. Across the board cuts mean everything gets cut indiscriminately – it is not looking carefully at where reductions should come from. The amount to be cut this year is $85 billion.

Rutgers Today: How will the sequester affect higher education? Should college students be worried?

Altshuler: Federal research grants will be subject to the sequester. This means less money for university researchers. Just to take two examples, the National Institutes of Health and the National Science Foundation are included in the sequester. Both are important sources of funding for research. Pell Grants are exempt but Federal Work Study and Supplemental Education Opportunity Grants are not. In short, universities and college students will be directly affected.

Rutgers Today: What other programs are going to be affected by the sequester? Are certain areas going to be hit harder than others?

Altshuler: The dollar amount of cuts are divided between defense programs and domestic programs. Most of the programs affected are discretionary spending and not mandatory spending. According to the Bipartisan Budget Center, discretionary and mandatory defense spending will have an annual cut this year of about 7.8 percent and non-defense discretionary spending will have an annual cut of about 5.2 percent. Medicare, a mandatory program, is subject to the sequester but cuts to providers and plans can't exceed 2 percent (beneficiaries face no direct cut). Other non-defense mandatory programs will have annual cuts of about 5.3 percent.

Rutgers Today: Are any programs exempt?

Altshuler: Yes, most mandatory programs are exempt. For example, Medicaid and Social Security are not affected. The same is true of some low-income programs including food stamps and welfare (Temporary Assistance for Needy Families).

Rutgers Today: What is at stake if the automatic cuts go through on Friday? What affect will it have on the economy?

Altshuler: The best bet is that the sequester will occur. We don’t know how it’s going to be rolled out. It's up to the Office of Management and Budget to tell each agency how much of their funding they can use each quarter of the year. All the cuts are not going to happen tomorrow or next week or within the next month. The $85 billion is spread out over this year.

The Congressional Budget Office projects an economic growth rate of 1.4 percent this year but that the sequester would drop that rate to .8 percent. It will make an economy that is growing slowly this year grow even slower.

Rutgers Today: Do you see any path to compromise?

Altshuler: While I do not think the two sides will reach an agreement before Friday, I think there is a very good chance there will be an agreement by the end of March. On March 27, the stopgap budget funding government runs out. If no new appropriations bill is passed before then, the government will shut down. The threat of a government shutdown should force a deal.

Any deal will ultimately involve spending cuts but they will not be indiscriminate across the board cuts. It is still going to be painful but there is an efficient way to do it and an inefficient way to do it. If this was your household, you might want to stop going out to dinner – instead of cutting how much you spend on your heating bill by 20 percent along with cutting your mortgage payment by 20 percent.