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EVERYTHING YO NEED TO KNOW TO TODAY'S SEQUESTER

Ezra Klein's Wonkbood

March 1,2013

Welcome to Wonkbook, Ezra Klein and Evan Soltas’s morning policy news primer. Send comments, criticism, or ideas to Wonkbook at Gmail dot com. To read more by Ezra and his team, go to Wonkblog.

Wonkbook’s Number of the Day: 0.1 percent. That’s the revised estimate of the Bureau of Economic Analysis for quarterly annualized real GDP growth in the fourth quarter of 2012. It has been slightly negative before revision — negative 0.1 percent — but economists had expected a bigger boost when the new number came out. The numbers suggest an economy fragile to sharp reductions in the government budget deficit.

Wonkblog’s Graph of the Day: What drives the budget deficits?

Wonkbook’s Top 5 Stories: 1) Everything you need to know for today’s sequester; 2) economic growth in final quarter of last year was anemic; 3) delay hits gun debate; 4) debt rising again; and 5) medicine’s future under Obamacare.

1) Top story: The sequester has arrived

This is probably a good time to read Wonkblog’s absurdly comprehensive sequester FAQ.

Congress shoots down two sequester replacement bills. “One day before automatic spending cuts were due to hit the Pentagon and other federal agencies, Congress on Thursday abandoned efforts to avert the reductions and left town for the weekend. The sequester is here, and policymakers have no plans to end it. President Obama is scheduled to meet Friday at the White House with congressional leaders, but expectations for the meeting are low.” Lori Montgomery and Rosalind S. Helderman in The Washington Post.

Explainer: The vote on those two bills: GOP alternative, 31; Democratic alternative, 51. Aaron Blake in The Washington Post.

So that means this is it? We’re getting the sequester? “The $85 billion in so-called sequester cuts push Washington, and the nation’s economy, into uncertain waters…For all the political drama they are generating, the cuts fall entirely on the smaller and already-shrinking part of the budget devoted to domestic and military programs that have to be renewed yearly by Congress.” Damian Paletta and Janet Hook in The Wall Street Journal.

WonkTalk: The strangeness of the sequester debate. Sarah Kliff and Ezra Klein in The Washington Post.

The sequester’s impact will build over time. “[T]he law does not create an immediate spending crisis or government shutdown like the ones that have loomed over so many of the previous budget fights in Washington. On Friday, the immediate impact on most Americans will be exactly nothing…It may take some time. Even the most direct impact on federal workers -- the forced furloughs -- will not happen in most cases for 30 or 60 days, after government managers have concluded negotiations with the unions that represent workers.” Michael D. Shear in The New York Times.

…And it will be felt unevenly. “The federal budget cuts kicking in Friday are designed to slice government spending across the board, sparing few programs. But in practice they will feel uneven and lumpy, shading the economic and political consequences. Communities heavily dependent on defense money, many already feeling the pinch from reduced federal contracting, will be hit hard by the cuts, known as the sequester. Other regions could be left wondering what the fuss is about as weeks or months pass without a noticeable effect on economic activity. Economies in and around the nation’s capital are likely to feel the most pain.” Sudeep Reddy in The Wall Street Journal.

Explainer: How bad will the economic effect of the sequester be? Economists answer. Perry Stein in The New Republic.

Believe it or not, we’re already moving onto the next fight. “Attention now immediately shifts to how Congress can avert a potentially calamitous government shutdown on March 27, when a stopgap continuing resolution, or CR, expires…To avoid a blowup, leaders in both parties seem determined not to use any extension of the CR as a vehicle to change the cuts significantly. But they could possibly provide incremental relief to agencies by updating their appropriations, from which the cuts are made.” Manu Raju and David Rogers in Politico.

@nycsouthpaw: Turning and turning in the widening gyre, the sequester cannot hear the sequesterer.

Wall Street doesn’t care about the sequester. “That's not to say that investors are thrilled about the automatic budget cuts--they just don't think the economy and the markets will be in upheaval because of them…Analysts point out, moreover, that the $85 billion in budget cuts aren't all real ‘cuts’ to current spending.” Suzy Khimm in The Washington Post.

White House issues more guidance on how the sequester will happen.“The White House budget office on Wednesday expanded its guidance on how federal agencies should reduce spending if the automatic spending cuts known as the sequester take effect Friday. In a government-wide memo, Office of Management and Budget controller Danny Werfel issued directions for handling furloughs, contracts, communication, acquisition, and federal assistance to outside entities, as well as for identifying non-essential costs.” Josh Hicks in The Washington Post.

@JimPethokoukis: As the sequester arrived, overhead, without any fuss, the stars were going out.

Why can’t all agencies avoid furloughs, if some can? “Some federal agencies appear to be better-positioned than others to avoid furloughs, which are likely to happen unless Congress and the president reach a deal to avert the automatic budget cuts set to kick in Friday. The Government Accountability Office, the Small Business Administration, the Smithsonian Institution and the U.S. Agency for International Development have all said they expect to meet their cost-saving targets without resorting to unpaid leave.” Josh Hicks in The Washington Post.

Republicans want to make the sequester better. Why won’t Obama let them? “At this point, Republicans basically support the sequester because it's all spending cuts, but they want the cuts allocated more intelligently. The White House opposes the sequester because it hits the economy too hard in 2013 and because it doesn't include tax increases, and so they want it replaced with a compromise proposal. And so Republicans want to make the sequester a bit better and a lot more permanent while the White House opposes efforts to make the sequester better precisely because it would make it more permanent.” Ezra Klein in The Washington Post.

@dmarron: Sequester’s original (but flawed) purpose was to force Super Committee action in Nov ’11. SC discussed spending and revenue.

…But Obama is going after the GOP for ‘choosing’ the sequester. “Republicans in the Senate faced a choice about how to grow our economy and reduce our deficit. And instead of closing a single tax loophole that benefits the well-off and well-connected, they chose to cut vital services for children, seniors, our men and women in uniform and their families. They voted to let the entire burden of deficit reduction fall squarely on the middle class.” Aaron Blake in The Washington Post.

House Republicans are thrilled that Boehner has stood his ground. “Speaker John A. Boehner, the man who spent significant portions of the last Congress shuttling to and from the White House for fiscal talks with President Obama that ultimately failed twice to produce a grand bargain, has come around to the idea that the best negotiations are no negotiations. As the president and Congressional Democrats have tried to force Mr. Boehner back to the table for talks to head off the automatic budget cuts set to take effect on Friday, Mr. Boehner has instead dug in deeper, refusing to even discuss an increase in revenue and insisting in his typical colorful language that it was time for the Senate to produce a measure aimed at the cuts.” Ashley Parker in The New York Times.

IRS won’t furlough until you pay your taxes. “Taxpayers should not expect a break on tax deadlines because of sequestration. The Internal Revenue Service will wait until after tax filing season before furloughing its workers, the agency's acting commissioner told employees Thursday…If sequestration occurs, IRS employees should expect to be furloughed for five to seven days, or no more than one per pay period, before the end of the fiscal year, Acting Commissioner Steven T. Miller told employees in a memorandum.” Steve Vogel in The Washington Post.

How the sequester hits healthcare. “Although the Medicare program will account for the largest chunk of dollars cut from healthcare simply because of its great size, the scheduled 2% reduction in its payments to doctors and hospitals is significantly smaller than what many public health and research programs face. Laboratories at major universities and medical centers are already laying off scientists, even before the latest round of cuts is scheduled to take effect. And local public health officials, hit by years of cutbacks, are scaling back immunization campaigns and other efforts to track and control infectious diseases.” Noam N. Levey in The Los Angeles Times.

YGLESIAS: The case against sequestration is massively overstated. “OIn the merits it seems to me that while sequestration is hardly optimal budget policy, it really isn’t all that bad in the scheme of things, and really going through with it would be better than repealing it. The key reason is that fully half the cuts are cuts to ‘defense’ spending, and yet nobody from either party is seriously trying to maintain that America will be left defenseless in the wake of this reduced military spending.” Matthew Yglesias in Slate.

KAPLAN: No, the Pentagon cuts could be chaos. “[E]very single program, project, and activity--every line item in the Pentagon budget, from the biggest weapon system to the smallest spare part--has to be cut by that same 9 percent…[T]he Defense Department has to furlough nearly everyone in its civilian workforce; that's the only way to meet the required budget cut for personnel overall. Specifically, civilians will have to take one day off per week, without pay, for the last 22 weeks of this year.” Fred Kaplan in Slate.

BARRO: No cheers for sequestration. “Deficit reduction is destimulative, a fact that would be similarly true of any sequester replacement with the same deficit impact. The other, unique to the sequester, is that it is haphazard and unpredictable. An alternative deficit-reduction plan could provide clarity about who would lose their jobs and whose contracts would be axed.” Josh Barro in Bloomberg.

CAPRETTA AND TROY: Obama had much more flexibility on the sequester than he admitted. “[D]oes a sequester have to be disastrous? Could the White House wield the scheduled cuts in such a way as to minimize the impact felt by the American people? Our experience inside the executive branch suggests that this is indeed the case: The administration could have prepared for the sequester in ways that would steer cuts toward less sensitive programs and activities. In fact, it still has the capacity to adjust some, although certainly not all, of the ways in which the sequester is applied.” James C. Capretta and Tevi Troy in National Review Online.

CHEN: What Obama doesn’t say about sequestration. “[T]he cuts are best described as much ado about nothing. The Heritage Foundation recently concluded that, in total, sequestration over the next 10 years reduces spending by just 2.4 percent…[S]equestration is doing exactly what it was designed to do. It is forcing both Republicans and Democrats to give a little bit on their spending priorities to further the important cause of fiscal discipline.” Lanhee Chen in Bloomberg.

NOONAN: The President’s no-deal strategy. “How’s the president’s game going? What’s new is that almost everyone does seem to understand he’s playing games. He used to get more credit. His threats of coming mayhem and his lack of interest in easing it have dimmed his luster. Certainly in the past few weeks he’s become more aggressive and gameful. A crisis is coming--a series of crises actually, with more ceilings and the threat of a government shutdown--and he is not engaging or taking ownership.” Peggy Noonan in The Wall Street Journal.

Music recommendations interlude: Dire Straits, “Lady Writer,” 1979.

Top op-eds

ZIDAR: The economic research technique you need to know about. “[E]conomists have increasingly been using regions within the United States as labs of democracy, measuring contrasting approaches in various states to determine both why the recovery is sluggish and what to do about it…The findings on the effects of government spending in hard economic times strongly suggest, for example, that cutting spending today will hurt growth and reduce job creation.” Owen Zidar in The New York Times.

STRASSEL: The GOP takes back tax reform. “The news--which by rights overshadows sequester, the Oscars, maybe even the pope’s resignation--is that Republicans are not only doing a tax rewrite this year, but making it their signature policy initiative. Maybe the GOP is tired of losing after all.” Kimberley Strassel in The Wall Street Journal.

KRUGMAN: Ben Bernanke, hippie. “Will it make any difference that Ben Bernanke has now joined the ranks of the hippies? Earlier this week, Mr. Bernanke delivered testimony that should have made everyone in Washington sit up and take notice. True, it wasn't really a break with what he has said in the past or, for that matter, with what other Federal Reserve officials have been saying, but the Fed chairman spoke more clearly and forcefully on fiscal policy than ever before -- and what he said, translated from Fedspeak into plain English, was that the Beltway obsession with deficits is a terrible mistake.” Paul Krugman in The New York Times.

ALTER: Why Democrats must grow up on social-insurance programs. “Americans should rest easy that some money would be there for them if they lived long enough to need it. The whole point was ‘insurance against need.’ ‘Guaranteed return’ and ‘insurance against need’ should continue to be the two guiding principles of social-insurance reform. ‘Guaranteed return’ means no privatization or voucher system for these programs…’Insurance against need’ suggests keeping the focus on poor and middle-class recipients who depend on the money most. That means means-testing, giving wealthier retirees less.” Jonathan Alter in Bloomberg.

KLEIN: How the aging of America is hurting the Republicans. “A party made up of old people will have trouble cutting Medicare, and lo and behold, today's Republican Party, despite believing Medicare the key cause of our budgetary troubles, is even more protective of its near-term spending than the Democrats. A party so reliant on elderly voters could hardly be otherwise.” Ezra Klein in The Washington Post.

SACHS: A carbon tax is a better idea than cap-and-trade. “[T]here is a much better strategy than tradable permits. Each region of the world should introduce a tax on CO2 emissions that starts low today and increases gradually and predictably in the future…With a long-term and predictable carbon tax and subsidy system, the world would move systematically toward low-carbon energy, greater energy efficiency, and CCS.” Jeffrey D. Sachs in Project Syndicate

DALMIA AND SNELL: Weak evidence on preschool. “As evidence for these remarkable claims he pointed to Oklahoma and Georgia, the early adopters of universal preschool. But the real evidence from those states suggests that preschool doesn’t deliver on even its most basic promises.” Shikha Dalmia and Lisa Snell in The Wall Street Journal.

FELDSTEIN: Two dollar fallacies. “While the future evolution of these imbalances remains unclear, the result could eventually be a sharp rise in long-term interest rates and a substantial fall in the dollar's value, driven mainly by foreign investors' reluctance to continue expanding their holdings of US debt. American investors, fearing an unwinding of the fiscal and monetary positions, might contribute to these changes by seeking to shift their portfolios to assets of other countries.” Martin Feldstein in Project Syndicate.

Anagram interlude: “Senators Quiet” and ”Tears Question.”

2) A limping economy

The economy grew only 0.1 percent in the final quarter of 2012. “The U.S. economy didn't shrink at the end of last year after all, according to revised government data released Thursday, but it barely grew. The updated estimate of the nation's gross domestic product showed it expanded at an annual rate of 0.1 percent during the fourth quarter -- just above stall speed. Though tepid growth is better than none at all, the report still shows a fragile recovery that has been too weak to make a significant dent in the nation's unemployment rate. The adjustment was also smaller than some economists had hoped for.” Ylan Q. Mui in The Washington Post.

The recession turned middle-class jobs into low-wage ones. “The U.S. job market is slowly improving, and most economists expect that gradual recovery to continue this year. Yet one of the most disturbing trends of the recession is still very far from being reversed. America's middle-class jobs have been decimated since 2007, replaced largely by low-wage jobs. A recent presentation from the Federal Reserve Bank of San Francisco lays out the situation clearly. The vast majority of job losses during the recession were in middle-income occupations, and they've largely been replaced by low-wage jobs since 2010.” Brad Plumer in The Washington Post.

Meanwhile, U.S. oil production hits 20-year high. “Average daily crude oil production in the United States hit a 20-year high during November and December 2012, according to the U.S. Energy Information Administration (EIA). Increased output from North Dakota and Texas pushed daily production to more than 7 million barrels per day, the highest mark since December 1992.” Zack Colman in The Hill.

While U.S. oil demand hits a 16-year low. “U.S. oil consumption posted an unexpected drop in December, pulling total demand for 2012 to the lowest annual level since 1996, the U.S government said on Wednesday. The decline is the latest chapter in a years-long stretch of tepid oil demand in the United States, reflecting a weak economy and high unemployment, growing vehicle efficiency and high fuel prices that have cut into usage. The Energy Information Administration said in its monthly petroleum supply report that oil demand in the world’s top consumer dipped to 18.13 million barrels per day in December, down 4.4 percent or 835,000 bpd from a projection last week.” Ayesha Rascoe in Reuters.

Humorous interlude: Robert Gibbs’ life after being the WH press secretary, according to The Daily Show.

3) Gun debates delayed

Senate postpones gun deliberations. “Senators working on legislation to curb gun violence postponed consideration of the measures for at least a week, a move that gives a bipartisan group working on a plan to expand the nation's gun background check system more time to reach an agreement. The Senate Judiciary Committee agreed Thursday to reconvene March 7 to begin considering bills sponsored by Democrats to revamp the background-check system, make gun trafficking a federal crime for the first time, bolster school security programs and ban hundreds of military-style assault weapons and parts.” Ed O’Keefe in The Washington Post.

Plans to revive the ATF face opposition. “The Obama administration's plans to energize the embattled agency that regulates the firearms industry and investigates gun violence are already running into trouble on Capitol Hill, foreshadowing the difficulties facing the president as he moves to advance his gun-control agenda.” Sari Horwitz and Peter Finn in The Washington Post.

Astronomical interlude: Black hole spins at close to speed of light. It doesn’t get much cooler than this, folks.

4) Is debt coming back?

Consumers return to debt. “Americans late last year took on more debt for the first time since the throes of the recession, a sign that consumers are feeling more comfortable borrowing after years of cutting debt to fix their finances. Household debt, which includes mortgages, credit cards, auto loans and student loans, rose 0.3% to $11.34 trillion in the fourth quarter of 2012--the first fundamental increase since the third quarter of 2008, the Federal Reserve Bank of New York said Thursday in a report.” Neil Shah in The Wall Street Journal.

Uncle Sam is trying to figure out how to get out of housing finance. “Currently, the government backs about 90 percent of newly issued mortgages, more than ever before…[A commission] wants to preserve the F.H.A., but orient it more to those who need the most help. It would phase out Fannie and Freddie -- something that is politically necessary -- but replace them with something that sounds sort of similar.” Floyd Norris in The New York Times.

Student loan delinquencies soaring. Is this an emerging crisis? ”The number of young borrowers who have fallen behind on their student loan payments has soared over the past four years, the Federal Reserve Bank of New York said in a report released Thursday. According to the report, 35% of people under 30 who have student loans were at least 90 days late on their payments at the end of last year, up from 26% in 2008 and 21% at the end of 2004.” Ruth Simon and Rachel Louise Ensign in The Wall Street Journal.

What motivated Fed dissenters? Economic growth for me but not for thee. “[T]he four Fed districts whose presidents have dissented most frequently are also the Fed districts that had the fastest economic growth between 2008 and 2011, the most recent year for which data is available…The evidence suggests regional presidents are seeing the national economy through the lens of local experience. Which, as it happens, is exactly what they are supposed to be doing. The Fed's structure was meant to ensure that regional perspectives were heard. It seems to be working.” Binyamin Appelbaum in The New York Times.

Vitter, Brown look to reform “too-big-to-fail.” “Brown and Vitter said that despite Dodd-Frank financial reforms following the banking crisis, large banks have continued to benefit, and that if another crisis hit, the banks would only be larger and need even more taxpayer dollar for a bailout. They said their bill would reduce the amount of capital and subsidies for large banks and likely cause them to restructure.” Ramsey Cox in The Hill.

The link you’re going to send to everyone right now interlude: Rube Goldberg machine designed to separate Oreo filling from cookies.

5) The future of medicine under Obamacare

How medical services in pharmacies could change healthcare. “Pharmacy chains are branching out into health-care services, as a way to counter a slowdown in prescription drug sales and evolve beyond just dispensing pills. In the most recent development, Rite Aid Corp. will open 58 stores, across four markets, which contain in-store clinics providing virtual doctor visits conducted via Web camera. The walk-in clinics--which charge patients $45 for a 10-minute chat with a doctor on a computer monitor--will be rolled out Friday in Baltimore, Boston, Philadelphia and Pittsburgh. Previously, Rite Aid had piloted the virtual clinics in nine stores in the Detroit area.” Timothy W. Martin in The Wall Street Journal.

Interview: Sen. Jay Rockefeller on the future of Obamacare. Sarah Kliff in The Washington Post.

Arkansas’s unusual plan to expand Medicaid. “The Medicaid expansion has emboldened Republican governors to strike all sorts of deals with the Obama administration. They're willing to make the program larger, the thinking tends to go, only if they can make it more conservative in the process. The most interesting deal though may be coming out of a state with a Democratic governor: Arkansas. There, Gov. Mike Beebe must get 75 percent of his legislature to sign off on any funds necessary for the Medicaid expansion -- a tough sell when Republicans control both the state House and Senate. What the legislature could be sold on, they told the governor, was this: Using billions in federal Medicaid dollars to buy private health insurance coverage for the state's lowest income populations.” Sarah Kliff in The Washington Post.

The case for FDA reform. “The inability of the Food and Drug Administration to keep pace with changes in medical science threatens both economic prosperity and public health. The drug-approval process is glacial: It takes about 12 years and $1.2 billion to develop a single new drug that is approved by the FDA. The council's report [the President's Council of Advisors on Science and Technology] establishes an ambitious, yet reachable, national goal: doubling the current annual output of new medicines for patients. We believe existing evidence suggests this goal can be met by altering the FDA's onerous clinical-trial requirements.” Tomas J. Philipson and Andrew von Eschenbach in Bloomberg.

Those Medicare tax surcharges didn’t have inflation-indexed thresholds. “I'm talking about the 0.9 percent tax surcharge on the amount by which -individuals' "earned income" -- such as salaries and fees -- exceeds $200,000 this year, and the 3.8 percent surcharge on some or all the investment income of single households with an adjusted gross income of more than $200,000, and married households with an adjusted gross of $250,000 and up…These surcharges were built into the Affordable Care Act (a.k.a. Obama-care). The problem isn't the tax surcharges themselves -- it's the fact that the thresholds for them aren't indexed for inflation. This means that unless something is done, more and more people will be subject to these taxes as inflation boosts incomes.” Allan Sloan in The Washington Post.

Reading material interlude: The best sentences Wonkblog read today.

Wonkblog Roundup

Has the American Bar Association kept our judges white and male? Dylan Matthews.

Barnes & Noble is in trouble. But bookstores aren’t doomed just yet. Brad Plumer.

Why won’t Obama let Republicans improve the sequester? Ezra Klein.

How Arkansas is expanding Medicaid. Sarah Kliff.

Wall Street on sequestration: Meh. Suzy Khimm.

WonkTalk: The sequester gets weird. Ezra Klein and Sarah Kliff.

How the aging of America is hurting Republicans. Ezra Klein.

Interview: Sen. Rockefeller on Obamacare. Sarah Kliff.

The economy has eaten middle-class jobs and spat out low-paying ones. Brad Plumer.

Et Cetera