Sequestration refers to the automatic spending cuts that the government of the United States passed into law in 2011, and which went into effect March 1st of this year.  The original idea was that the impending meat cleaver approach to the budget would force a contentious Congress to reach agreement on smarter and more targeted cuts for the good of the country. Common sense might tell you that making intelligent budget cuts would be better than reductions across the board. Most people held that view.

But my common sense argues the opposite. I say dumb cuts are every bit as good as intelligent cuts, at least for cuts of the size we are discussing. I'll explain.

For starters, consider how often common sense is wrong. My most-used example is that common sense tells you that investing in individual superstar stocks would give you a better return than buying the market average. But we know from studies that buying individual stocks is a sucker's game unless you have insider or special knowledge. Common sense often steers you toward calamity.

The thing we call common sense is in reality some mixture of bias, fear, self-interest, ignorance, misjudgment, emotion, and about a dozen other psychological malfunctions. Common sense only operates well in simple situations, and the budget of the United States is far from simple.

When the sequestration was originally contemplated, the hope was that by 2012 Congress could get past partisan politics and agree on intelligent, common sense cuts. The flaw in that plan is that intelligence and common sense aren't real things when it comes to the budget. If you fired everyone in Congress today and replaced them with new folks, you would end up right back where we are. In the context of massive complexity, common sense and intelligence are nothing more than the soothing sensations our brains provide so we'll feel less frustrated and confused. Our tiny brains prefer simple statements such as:

Cut that defense budget!

Stop giving those freeloaders my money!

Yay for solar power!

I have a bit of insight about across-the-board budget cuts because I was a budget manager for a bank and then a phone company during a portion of my corporate career. My job was to present management with enough information for them to make "intelligent" budget decisions. Management would look at my information, assume it was nothing but a compilation of lies from department heads, and proclaim a 10% budget cut across all departments.

And oh how the department heads squawked about the irrational budget process. But they made the cuts, after much complaining, and life went on. As the budget guy, I got to see how many doom and gloom stories transpired because of the "dumb" cuts. Answer: none. I never saw a real business problem that could be traced back to the budget cuts. People simply adapted to the new constraints.

I would go so far as to say that sometimes the best way to improve a department function is to cut its budget. Constraints generate creativity. People will only try hard to improve if it is necessary. A fully-funded budget removes that creative energy.

Consider this highly simplified example. Let's say a government-funded medical procedure costs $1,000 per patient, but the budget cuts make it impossible to spend that much for the coming year. Once the constraints are in place, you might see more effort in searching for cheaper solutions across the globe. Before the cuts, there was no reason to even look for a cheaper solution. Now folks might do research and discover that India has a procedure that costs $100 and produces the same result. Or you might do a study that results in a better understanding of which patients will respond to the treatment, so you can skip the people who wouldn't have been helped. For the best results in the long term, you need a healthy balance of both funding and constraints.

The best way to ruin a good program is to overfund it until everyone involved gets fat and lazy. One could argue that the best way to improve a program - once it has reached a massive national scale - is to cut its budget and force some creative energy into the system.

So while most of the country was worrying that the dumb budget cuts of the sequestration would lead to doom, I was thinking it was a brilliant work-around to a failed Congress. The dumb budget cuts would be no worse than intelligent cuts, and we'd gain some degree of predictability about the fiscal future. The economy loves predictability.

This is another situation in which the Adams Law of Slow-Moving Disasters comes into play. The law states that any looming disaster that the general public recognizes years in advance will be solved. For example, if today the government proclaimed that Social Security would go away in the year 2040, the country would adapt. And the solution would likely have many advantages over Social Security in the long run. For example, perhaps it would trigger a massive wave of home upgrades as people add in-law apartments to their existing homes. The economy would boom, grandma would be close to the grandkids, and you could easily feed her with the money you saved by not paying Social Security every month. When she dies, you have an extra space to rent.

Don't get too caught up in my examples. I'm just making the case that budget constraints fuel creativity. And that trade-off is sufficiently unpredictable that common sense simply can't tell you whether to cut a particular large program or not.

So how do you make budget decisions in the face of massive unpredictability? That's simple: You pick the path that is cheapest. And that is roughly what the sequestration did.




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May 24, 2013
The existing budget allocations were made over a long period of time, with more thought and analysis (one hopes) than is possible during a single budget-cutting session. It's silly to think that the same people who chose the current budget allocations over many years will be able to make superior allocations by arguing with each other for a few weeks. Across-the-board is thus likely to be more optimal than anything Congress can come up with.
May 16, 2013
While I agree with the fundamental principle of cutting budgets, something else is clearly at work here. The US budget in 1980 was $532B. Yes, that's right, 30 years ago, the budget was ONE-SEVENTH of the current one. Even factoring for inflation, we are spending 2.5 times as much now as we did then.

I don't know about any of you, but I certainly do not feel like I am getting 2.5 times as much value out of our government as I did in 1980.

Kingfisher has the most salient point, that the government budget is not in any way constrained by revenue. Fixing this would go a long way toward reining in the constant upward spiral. When people have to start actually pay for the services they receive, suddenly they become much pickier about what they need.
May 16, 2013
Much of what you say is very true, but it's giving up on our efforts to control our destiny. Not good in the long run.

Also, the weaker elements of our society are more likely to bear the brunt of the axe blows if only because they are less able to defend their interest. Not good in the short run.

Let's continue to favour the surgical approach. With practice, we will become better at it.
May 16, 2013
You've just described in perfect detail why it is far better to let capitalism work than it is to let government run amok.

Someone here mentioned zero-based budgeting. That point needs to be expanded upon. Zero-based budgeting means that each year, the government budget for each line item is said to be starting at a percentage larger than the year before. The reason for this is that government says there will be inflation and population increase, so therefore the budget must increase to reflect these assumptions. So each year, the budget automatically starts out larger than the year before.

So when the government makes 'cuts,' what they are actually doing is slowing the rate of increase. If, based on the zero-based budget, a certain line item was increased year one to year two from ten billion dollars to eleven billion dollars, and due to some budget cut agreement it is reduced to an increase of only $10.5 billion, the government counts this as a $500 million decrease, when in reality it is a $500 million increase over the spending levels of the year before. Only in Washington, as they say.

Now, there's the use-it-or-lose-it reality. Government groups are always in competition to prove that they need more money. If they get more money, they can hire more people, and their power increases. Now, how do they get more money? Simple. By spending more than their department was budgeted for, and claiming that this proves they were underfunded to begin with.

Government agencies who are efficient and spend less money than they were budgeted get their budgets cut the next year. Notice that this is punishment for being efficient, and reward for being wasteful.

Gee, I wonder if there's any other area where this concept is apt? Perhaps, taxation versus welfare payments? If you reward someone for taking other people's money and punish someone who earns the money the other person takes, which do you get more of and which do you get less of?

This is the problem that we have to face. Government has no incentive to save the taxpayers' money, and every incentive to spend ever increasing amounts of it. The system itself is flawed. Government doesn't want to change the system. Why do you think that there are over 43 million people on food stamps now? And what's the government doing? Are they trying to figure out how to help those people become self-sufficient?

No. They're using taxpayer money to advertise to get MORE people on food stamps. This is compassion gone insane. A news report a couple of days ago said that fully 1/3 of the people in Puerto Rico are on food stamps. And the government employees who run the food stamp program are getting happier and happier with each new enrolee.

We don't reward government employees for being efficient. We punish them. We don't reward those who earn money and provide jobs; we punish them. We encourage people to not work, or to work at low-paying jobs, or under-the-table jobs, because we punish them (in their eyes) when they start to become self-sufficient by making them pay taxes.

Is it any wonder that our national debt is over $16 trillion, and increasing? Is it any wonder that our government is borrowing about 42 cents of every dollar it spends? Is it any wonder that our government doesn't think anything about throwing half a trillion dollars down a solar-energy rathole? After all, it's not THEIR money. It's not even our money. It's the Chinese government's money.

And our current government thinks the best thing to do is to keep taking that long walk off that short pier. And so, I'd wager, do many of you. And perhaps, even, so does Scott.
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May 15, 2013
@tinyhands, they didn't roll back any FAA funding cuts, they allowed them to shift spending from capital improvement to operations. Shifting long-term maintenance and improvements to short-term getting Congresspeople home to their districts quickly. Great thinking, huh? And Medicaid was not included in the sequester.
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May 15, 2013
I agree that most businesses and government agencies can absorb a budget cut - and learn to provide the same services more creatively. Unfortunately, that creativity often involves cost shifting. The rise in the number of folk receiving disability benefits (and hence saddled with a huge disincentive to return to work), is a result of states actively working to reduce their costs by shifting poor families into the federal system.

I'm not disagreeing with the main point - but we still get stupid results at times.

The sequester has effected my family a bit. My oldest kid is a West Point cadet. His summer/fall schedule has been up in the air - as they figure out which programs they will fund. At the moment it looks like he will have an opportunity to study abroad in the fall - because someone stepped forward with private funding for that program. Training is a little dicier. No on stepped forward to replace funds for his summer training program. That may be cancelled - and could either impact his ability to graduate on time - or lead to some watered down replacement program.

Of the two - honestly if you are going to send my kid into a war zone - and ask him to lead others, I'd kind of like him to have as much training as possible. If WP were choosing where to allocate funds themselves, they'd probably go with training as well. When you fill gaps with private donations, you have less flexibility. I'm not worried he's going to be horribly under-prepared for whatever mission he is eventually assigned, but I'm not thrilled with situation either.

Of course if congress gave the military full flexibility to pick and choose where to make cuts, this would not be an issue.
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May 15, 2013
I understand what you are getting at... but... In your private sector examples the top line of the budget was cut and the department was asked to figure out a way to do the same thing for less. That type of cut will increase productivity (up to a point). However, sequestration cut budgets uniformly in a way that means that government has no choice but to reduce the services it provides. They are still just as inefficient (maybe more)... they just also produce less. It is designed in a way that prevents the productivity boost because the departments don't have the authority to allocate the cuts.
May 15, 2013
[Paul Krugman comes to mind and I am surprised on a daily basis that his skull doesn't simply explode in a shower of angry confetti because the world isn't a perfect image of what he wants it to be.]

@GrumpyJames - that is one of the funniest, most accurate things I have read in a long time...
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May 15, 2013
Hi Scott,

This is nothing to do with this topic, but you have mentioned it in the past so I thought you would be interested in this article (from The Guardian)

Doctors have not been able to diagnose why his (Larry Page's) vocal cords are hobbled, according to Page. The trouble could be tied to another health problem, Hashimoto's thyroiditis. Page said he was diagnosed with that condition in 2003. He described it as a "fairly common benign inflammatory condition of the thyroid which causes me no problems".

May 15, 2013
I picked up on a news story this morning on Reuters...
HSBC accelerates cost cutting in drive for profit boost.

It made a big thing of the fact that they plan to cut costs by $3billion.
It made this sound like a major initiative.

But the kicker came at the bottom, when it said the bank was valued at $210 billion.
That means that they are cutting 1.5%! Over 3 years! Big deal.

The media when reporting on government does the same.
Headline figures, which usually conceal how small any cuts are.

It is hard to grasp just how humungous government spending really is.
They could cut 10%/yr for the next ten years and it would only bring it down to a sensible level!
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May 15, 2013
[Some experts argue that there are simple changes to the way we farm that could reverse global warming.]

I hope you're not referring to this guy: http://www.slate.com/articles/life/food/2013/04/allan_savory_s_ted_talk_is_wrong_and_the_benefits_of_holistic_grazing_have.html
May 15, 2013
Totally off topic and you probably know as you have better news sources anyway, but you might be right about Larry Page...
May 15, 2013
Sequestration has set off the Washington Monument Gambit on a grand scale. Basically the idea is to protest the cuts by picking areas (like the Washington Monument) to make changes that are unacceptable to the public. This is what creates the inertia to always increase - never decrease - agency spending even when there is a rational case to be made that an agency no longer serves any useful purpose or that its role could be replaced with automation or consolidation. In the future we may not need air traffic controllers but somehow I doubt the FAA will have its budget cut to reflect new realities of technology. In many ways, as you said, the desire for ever-increasing budgets is a real deterrent to progress and efficiency.

The jury is out as to the long term effects of sequestration but certainly the Keynesian people were screaming gloom and doom and it hasn't happened. Paul Krugman comes to mind and I am surprised on a daily basis that his skull doesn't simply explode in a shower of angry confetti because the world isn't a perfect image of what he wants it to be. But I am inclined to think they are right in some fundamental ways. The problem is Keynes isn't a complete theory and it isn't the only solution to economic woes - nor even the best solution. I believe it is a reasonable approach when the underlying problem is irrational consumer confidence and depressed demand - but for the above stated reasons largesse may be the exactly wrong response to structural problems, because there is no incentive in a climate of largesse to make necessary changes.
May 15, 2013
Humans are wonderful at adapting to the !$%*!$%*!$%*! around them. The sequestration was intended to get congress to work together on finding a better way to reduce the deficit and bring us back to a road of financial health. It didn't work. Therefore, there was no incentive for congress to get past their ideals and idiocy to work together to find a solution to the budget problem.

Solution: Have independent people who do not answer to their constituents (lobbyists), or are forced to think along their party lines. I'm sure a very small team of brilliant people can find a very plausible solution.

Moreover, a good leader would find ways to fundamentally change some facets of government so as to eliminate huge chunks of waste, make it fair and have a long term sustainability. The current method of congress creating bills to blow out their pockets with cash is unsustainable.

With the advent of all this rapid communication, people will find it harder to put up with the leadership and eventually revolt. It's how our country was founded. While it may have turned out OK, at least so far, it may one day see its run come to an end due to corruption, idiocy and arrogance.

The one beauty of our system is that we can refresh the entire leadership of our nation within 6 years. I would love to see every single person in government not win their next election. If anything, it will send a message to future leaders that they serve at the leisure of the public. They answer to the people. Right now, they don't. They answer to whomever is shoving money in their pockets.

Lastly, there needs to be a leader who is strong enough to stand up against he onslaught of all that's wrong, whether it's in his power to affect or not. A true leader leads. He (She) finds ways to rally the populace and fuels our passion to become better.

The solutions to our problems aren't finding actual solutions to the problems, those problems are easy to solve, it's fighting against those who stand something to lose. Those people fight for purely selfish reasons, in spite of all the good that can come from them standing down. For that reason, a complete house cleaning of our elected leaders is necessary. Sure, the same problem will eventually rise again, but we can only hope the people who finds themselves in the same predicament, find the courage to change again.
May 15, 2013

You seem to think that it's a foregone conclusion that what you learned in the private sector about the forced "creativity" imposed by budget cuts, will somehow apply to government workers, and in particular government managers. In your analysis of the effects of sequestration did you learn of a single government agency that approved layoffs as a result of the budget cuts? Without the real fear of a loss of employment, government workers/managers don't have a real incentive to do "anything".
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May 14, 2013
"a d j u s t i n g" for inflation. I can't even think of anything dirty in that.
May 14, 2013
I agree wholeheartedly. Now if we could just downsize the government on a much grander scale, we'd be getting somewhere. As RayKremer pointed out, we didn't even "cut" most budgets, but reduced their increases. Nothing revolutionary here - which is what makes the draconian service cuts all the more laughable - they have more money than they did a few years ago, but somehow can't keep planes in the air. I also like AtlantaDude's education example we've DOUBLED the dollars spent per student !$%*!$%*!$ for inflation) in the last few decades, with no improvement in educational performance. Try cutting the budget in half. Technology should make it much cheaper now than back then.

At the time the sequester was put into law, I don't think many (anyone?) expected it would happen. But early this year I began to think it was genius. It's the only way get certain cuts through our political system. As you pointed out, "smart" cuts are hard to define. I'll go you one better and say that some are clear, but will never happen because they're unpopular.

Just one example: a fuel tax. We could reduce oil consumption (and imports), increase revenue, and spur innovation all in one swoop. But it's so visible, so often (every time you fill up or pass a gas station) that we instead do gas-tax holidays to buy votes. We mandate and subsidize lousy technologies and lousy companies when we could let private innovation and consumer demand drive solutions while increasing revenues (or cutting offsetting taxes on incomes). But it's unpopular and therefore politically impossible.

Too bad the sequester wasn't 25 or 50% of the federal budget and include a $3/gal fuel tax. Then we'd see real change.
May 14, 2013
Unfortunately, Congress has already started carving out exceptions. They allowed the FAA to maintain its budget to ensure there are enough air traffic controllers and they're insisting that the Army buy a bunch of tanks that they've publicly stated they don't want. By the time the elections roll around, they'll have undone cuts to medicare & medicaid to just ensure that they get reelected. In the meantime, they'll be using every excuse possible to get on TV, from Benghazi to the IRS targeting and AP phone hacking.
May 14, 2013
Scott makes a number of good points, but there are some flaws in his reasoning as well. Budgets by the federal government aren't like personal or corporate budgets, because there isn't actually a revenue constraint. There is an arbitrary one created by politics, but the government can mobilize any existing resources it deems prudent at will. They won't, but they can.

Secondly, my understanding of the sequestration is that the across-the-board cuts were made in a really dumb way. The most sensible way to do across-the-board cuts are as you say - tell the department heads to make do with less, and let them figure out how to do it. I'm not sure how exactly sequestration was implemented, but that wasn't it.
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May 14, 2013
In the UK, we have a Health System that used to work really well. Paid for by taxes, it offered 'free' treatment for all and was widely respected. Then it started being used as a political football and massive cuts were instigated and a process that rewarded managers over nurses was put in place. Result - disaster. Then came a change in government and funding was put back in place. Result - carnage as the managers awarded themselves massive pay rises whilst cutting nursing staff even further. As people started dying, managers responded by bringing in Mission Statements and more managers. Now we have bloated offices with execs on sky-high salaries whilst medical staff spend so long filling in computer based forms that patients no longer figure anywhere. And don't get me started on the cuts to education.
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