Obama Accepting Sequestration as Deficit Shrinks

By Hans Nichols & Mike Dorning - May 28, 2013 12:00 AM ET

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Barack Obama on U.S. Economic Growth Outlook

President Barack Obama has stopped worrying and learned to live with sequestration.

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U.S. President Barack Obama is adjusting to the spending curbs he once derided as "just dumb," and attacks on sequestration have receded as a major theme of his speeches. Photographer: Saul Loeb/AFP via Getty Images

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With the economy growing, unemployment falling, Republicans unmoved in resisting tax increases and little sign of the public backlash the White House expected, Obama is adjusting to the spending curbs he once derided as “just dumb.” Photographer: Joshua Roberts/Bloomberg

Gone are the cold February predictions of mass layoffs, family upheaval and the prospect of a new recession because of the automatic, across-the-board spending cuts. Cabinet secretaries no longer visit the White House briefing room to offer dire forecasts about teacher firings or unsecured borders.
With the economy growing, unemployment falling, Republicans unmoved in resisting tax increases and little sign of the public backlash the White House expected, Obama is adjusting to the spending curbs he once derided as “just dumb.” Attacks on sequestration have receded as a major theme of his speeches.
“He probably has concluded that he can’t change it,” said Stan Greenberg, a Democrat who was a pollster for former President Bill Clinton. “He’s moved away from it because he thinks it’s giving Republicans leverage by focusing on it.”
As the president’s criticism of sequestration wanes, so do prospects for a budget deal big enough to address the U.S.’s long-term fiscal debt, a goal central to helping cement Obama’s legacy that has eluded him since midway through his first term.
Sequestration was designed to be so intolerable to both Republicans and Democrats that the parties would be motivated to reach a broad budget accord to avert the cuts, which would slash spending by $1.2 trillion over nine years. Republicans were supposed to come to the table to stop reductions in defense outlays -- which are targeted for about half the cuts -- and Democrats to restore funding for domestic programs such as special education, jobless benefits and medical research.

War Weary

The administration failed to appreciate the decline in Republican support for military spending after the unpopular wars in Iraq and Afghanistan, making the threat of defense cuts less potent, said Steven Bell, a onetime top Senate Republican budget aide.
“The number of people in the Republican caucus who knee-jerk say we need to have more defense spending is dropping dramatically,” said Bell, who is now a senior director at the Bipartisan Policy Center in Washington. “I don’t think there is any way to overstate the psychological toll those two wars in Iraq and Afghanistan has taken.”
The administration continues to seek a deal that would at least avoid larger automatic spending reductions, in talks with Republican senators, including John McCain of Arizona and Lindsey Graham of South Carolina. The lawmakers remain concerned about even deeper military cuts scheduled for next year.
Still, Bell said, “I really don’t see how they will get a major deficit-reduction deal or a tax-reform deal” after more than two years of stalemate because the sequestration isn’t forcing a compromise and the deficit is declining on its own.

Revenue Surge

The deficit is losing some of its political urgency as it falls because of a 15 percent jump in revenue from last year with the economy’s expansion, the expiration of a payroll-tax cut, and tax rates rising for married couples earning more than $450,000. The Congressional Budget Office estimates the gap this year will narrow to $642 billion, from $1.1 trillion last year.
Though the budget office projects that sequestration will subtract 0.6 percentage point from the economy’s growth this year, Americans’ job prospects are improving and financial markets are gaining.
The unemployment rate fell to 7.5 percent in April from 7.9 percent at the beginning of the year. The stock market has reached record levels, with the Standard & Poor’s 500 Index (SPX) rising almost 16 percent this year.

Bonds Gain

Investors remain sanguine about the government’s financial outlook. The yield on the 10-year Treasury (USGG10YR) note was 2.01 percent on May 24 in New York compared with 2.38 percent on Jan. 20, 2009, the day Obama was inaugurated for his first term.
Obama is painting a picture in speeches of a resilient economy that’s poised for robust growth. The gross domestic product increased at a 2.5 percent annual rate in the first three months of this year, though private forecasters anticipate growth in the second quarter will slow to 1.6 percent, according to the median estimate of economists surveyed by Bloomberg News.
To be sure, the president still brings up sequestration, mentioning it in at least four speeches this month, including on May 24, when he told graduates of the U.S. Naval Academy, “I’ll keep fighting to end those foolish across-the-board budget cuts,” which he said are “threatening our readiness.”
Sequestration, which will trim as much as $85 billion from the budget this fiscal year, will force the government to curtail services and lay off or furlough employees, including at the White House. Obama has said it will lead to the shutdown of campgrounds at national parks, reduce the number of children in the Head Start program, and eliminate 4 million meals for seniors.

Employee Furloughs

The Pentagon will impose furloughs of 11 days starting on July 8 on as many as 680,000 civilian employees, U.S. Defense Secretary Chuck Hagel said on May 14.
Still, when the president now brings up the possible effects of sequestration, it’s usually a few brief lines at a private fundraiser or in a speech dedicated to another topic.
“The fact is our deficits are going down faster than they have gone down in decades,” he said May 17 in Baltimore as he touted efforts to push infrastructure projects. “The American auto industry is thriving. American energy is booming.”
Obama also mentioned “this, you know, sequester that is slowing down growth,” as he pressed Congress to pass a budget that undoes the cuts, which went into effect on March 1. When he signed legislation on May 1 to end furloughs for air traffic controllers, there was no ceremony.

Seeking Compromise

White House spokeswoman Amy Brundage blamed Republicans for not working with Obama to find a solution to “these harmful, across-the-board cuts.” The president proposed a compromise in his latest budget that would eliminate sequestration and continue to lower the deficit, she said in a May 24 e-mail.
While some cabinet members, including Treasury Secretary Jacob J. Lew and Council of Economic Advisers Chairman Alan Krueger have consistently sounded the alarm about the effect the cuts will have on growth, Obama has largely moved on for now.
His allies say the president’s revamped rhetoric betrays an acceptance of the political reality that the cuts will remain in place until the summer, and perhaps longer.
With Republicans refusing to compromise on possible tax increases, he’s left with a “moderately performing economy that’s not in crisis, that’s addressing many long-term problems, including the deficit,” Greenberg said.

Rhetoric Shift

Obama began to shift his rhetoric on the cuts the day they were put in force. After warning for weeks that the impact would be swift and severe, he went to the White House briefing room and told reporters: “Not everyone will feel the pain of these cuts right away. The pain, though, will be real.”
Four days earlier, in Newport News, Virginia, he told the country to brace for the worst. “Companies are starting to prepare for layoff notices,” he said. “And the longer these cuts are in place, the greater the damage.”
Yet the public discontent that some of Obama’s senior advisers anticipated once the automatic spending cuts kicked in hasn’t materialized, except for a flurry of media coverage when the air-traffic controller furloughs began causing flight delays. Congress passed legislation to keep the controllers on duty by taking money out of a fund for airport improvements.
“The impact other than the air traffic controllers is diffuse,” Bell said. “Unless you know a federal worker who is being furloughed or a small business with a contract that is canceled, 90 percent of Americans don’t feel an immediate impact.”
To contact the reporters on this story: Hans Nichols in Washington at hnichols2@bloomberg.net;
To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net