Loren Thompson, Contributor
The House-Senate budget conference committee that began meeting last week isn’t just the best chance Washington has to avert another government shutdown in January. It is also an opportunity to escape the fiscal strait-jacket called sequestration that is doing huge damage to defense and domestic programs. Sequestration-level caps on spending resulted from the failure of an earlier bipartisan panel to find an alternative to automatic cuts contained in the Budget Control Act, and unless they are repealed or modified, they will remain in force until 2021.
There are plenty of places where Washington could economize without causing much harm. But the two parties are so far apart in their philosophy of government that bridging the differences between contending spending plans is difficult. In the current talks, a budget resolution passed by the Republican majority in the House that would cut popular entitlement programs by a trillion dollars over ten years (without increasing taxes) must be reconciled with a budget resolution passed by the Democratic majority in the Senate that would raise taxes by a trillion dollars over ten years (without decreasing entitlements).
Legislators are understandably skeptical that any “grand bargain” can be found to overcome what amounts to a two-trillion-dollar difference of opinion. The conference committee, which must report back on its budget recommendations for the current year and longer term by December 13, will probably propose a makeshift solution that keeps the government funded for a year or two without resolving underlying differences. The decision on which party’s priorities should prevail over the longer term will likely be left to voters next November.
But that doesn’t mean we are stuck with sequestration as it currently exists, because large numbers of people in both parties hate it. House Speaker John Boehner and House budget committee Chairman Paul Ryan have recently said there are smarter ways to generate savings, and the entire Democratic leadership in both chambers agrees. That sounds like the makings of a bipartisan agreement, if the conference committee can fashion an alternative that (1) saves money, (2) doesn’t raise taxes, and (3) doesn’t gut entitlement programs. Here is a framework for changes that could accomplish all three goals while removing the most destructive features of current sequestration provisions.
1. Aim for permanent, structural reductions in spending. The Budget Control Act caps spending for a set span of time without changing the underlying drivers of the budget deficit. The biggest entitlement programs are left largely untouched, while the limits on discretionary programs do not alter their basic character. So federal spending on healthcare benefits and other formula-driven welfare programs will just keep marching up, and discretionary spending will likely balloon once sequestration ends (to catch up with lost time). The Congressional Budget Office projects that even with recent tax increases and spending cuts, annual deficits will fall to about a billion dollars per day in fiscal 2015, and then increase to twice that amount in 2020. In other words, the national debt — which surpasses $20 trillion in 2018 under current plans — will keep rising.
If we want to change this dynamic, then we need a different approach to deficit reduction that restrains the drivers of rising outlays — as Paul Ryan has repeatedly pointed out. One such tool favored by the White House and congressional Republicans would be to change the formula for how the government calculates cost-of-living increases in entitlement programs and the tax code. CBO estimates that if all programs using the Consumer Price Index for these calculations were shifted to the “chained CPI” approach, over $20 billion per year could be saved after 2018 ($30 billion after 2020). If Medicare changed the way it provides prescription drug benefits to mirror the cooperative purchasing agreements used by the states under Medicaid, $15 billion could be saved annually. Structural changes such as these would permanently reduce federal spending.
2. Keep savings targets, but let cuts ramp up over time. The sequestration provisions of the Budget Control Act are harsh and impractical because they were supposed to motivate the parties to come up with something better. Neither party actually wanted to see them enacted, and now that they have been federal agencies are warning of dire consequences. Military readiness is plummeting, potentially life-saving scientific research is being canceled, and the FBI can’t find the money to train its agents. One reason for these early impacts is that cuts are level-loaded across the nine-year period during which the law is in force, so there is little time to make structural changes before savings must be generated. Even if federal managers were given latitude in deciding how to remain below annual spending caps, Secretary of Defense Chuck Hagel told Congress in July, “the cuts are too steep and abrupt to be mitigated by flexibility.”
It would make more sense to allow cuts to ramp up over time so managers can put in place structural changes that will produce big savings after the initial period of implementation. For instance, military personnel costs were reduced about 30% during the last big downturn in defense spending not by slashing benefits but by shrinking the number of warfighters who received them. The defense department today has plans for similar cuts in ground forces as overseas wars wind down, but it can’t generate savings in the early years unless it makes draconian moves like freezing promotions and forcing out returning warfighters. To avoid doing those things, it is imposing oversized cuts on training and technology – cuts that Hagel says could lead to higher casualties in future wars. This could all be avoided by sticking with the plan to save $1.2 trillion over nine years but allowing most of the savings to accrue in later years.
3. Focus on the way business is done to reduce waste. The Budget Control Act limits spending authority available to government agencies, but it does nothing to improve the efficiency with which funds are translated into program outcomes. That’s unfortunate, because much of the savings sought by the legislation could be achieved without curtailing federal functions by simply making the government a more efficient buyer. Nowhere is that more true than at the Department of Defense, which is the largest purchaser of goods and services in the world. Congress and the White House have made many attempts over the years to improve Pentagon processes, but because those efforts typically involved adding oversight, regulations, testing and reports, the result today is a baroque buying system that would bankrupt any private-sector enterprise.
My Lexington Institute colleague Dr. Daniel Goure has authored a series of studies explaining how the Department of Defense could save vast sums of money by reducing regulatory burdens, increasing competition, streamlining supply chains, using multiyear contracting vehicles and employing performance-based logistics practices. The low end of annual savings that he estimates could be achieved by transforming Pentagon business practices is $45 billion – almost as much as sequestration will carve out of the President’s defense request for 2014. If the Budget Control Act were changed to require savings from overhead functions and redundant regulatory rules that do not add value, the damage to military training and technology currently being caused by sequestration could be mitigated. A good place to start might be by mandating $10 billion in process savings — 2% of the Pentagon budget — in fiscal 2016.
4. Give managers the flexibility to make balanced reductions. The destructive impact of the Budget Control Act on agency operations is made far worse when major functions are arbitrarily excluded from reductions. During the first year of sequestration, fully half of the military budget was off the table for cuts, forcing managers to make disproportionately deep reductions in the remaining activities. Secretary Hagel has repeatedly warned that military readiness and modernization will suffer if his department is not given greater latitude to find savings in areas where unnecessary spending is known to occur. Similar circumstances presumably exist on a smaller scale at other agencies, leading to a budget-cutting process that is unbalanced and detrimental to the efficient use of whatever funding remains.
Although the budget committees lack authority to remove congressionally-mandated barriers to the efficient use of funding within agencies, the conference committee currently meeting can certainly recommend that legislators make it easier to comply with budget caps by removing arbitrary barriers to deficit reduction. I’m not referring to entitlements here, I’m talking about unneeded infrastructure, compensation packages that are out of whack with private-sector practices, and purchasing rules that protect favored constituencies. If these impediments to rational management are removed, then the government can operate more effectively within the spending caps specified by the Budget Control Act. And if greater flexibility for managers is combined with the other three improvements described above, then it will be possible to save well over a trillion dollars through 2021 with minimal loss to federal functionality.
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