We brought up a couple of weeks ago that there were a number of plans to replace the sequester for either a year or permanently. Now, CBO has given us detailed scores of three proposals: the Senate Democratic plan (the American Family Economic Protection Act, S. 388), a plan (S. 16) by Sen. Pat Toomey (R-PA), and a plan by Sen. Kelly Ayotte (R-NH) (the Sequester Replacement and Spending Reduction Act, S. 18). The Senate Democratic one failed to get the requisite 60 votes in the Senate last week, only receiving 51, while the Toomey proposal was voted down 38-62 last week. The Ayotte plan did not get a vote. However, these plans still provide some insight into each party's current approach to replace sequestration.

We described the Senate Democrats' plan previously. Its main elements, in addition to a one year cancelation of the sequester, include enacting the Buffett Rule ($53 billion), eliminating direct payments for agriculture ($31 billion), and reducing defense spending caps by $28 billion. The net savings from the bill total $2 billion.

^{Source: CBO}

The Toomey bill, rather than replacing the sequester with different policies, allows the President to allocate the cuts however he wishes. The President would be required to report this allocation by March 15, and the plan would be subject to Congressional disapproval by a majority vote. The CBO determined that the legislation's budgetary impact was unknown, since it would depend on how the cuts were allocated. However, they said that it was more likely than not that the result would be to increase spending relative to current law because the President could end up cutting spending that would not have been spent anyway.

The Ayotte plan that CBO scored has a number of different elements. These include a one-year repeal of the discretionary sequester (the sequester to certain mandatory programs remains in place); an extension of the federal employee pay freeze through 2014; an increase in recapture of exchange subsidies that are overpaid; a requirement that taxpayers claiming the refundable portion of the child tax credit provide a Social Security number; an increase in federal employee retirement contributions; a $20 billion reduction in the 2013 discretionary cap; a food stamp change that restricts qualification for the Standard Utility Allowance (an increase in benefits for energy assistance) to those who specifically receive low-income energy assistance payments (excluding those who simply apply or intend to apply); and a change to the Consumer Financial Protection Bureau which would subject it to the appropriations process and reduce its budget. Overall, the plan reduces ten-year deficits by $105 billion.

^{Source: CBO
*Involves reductions in discretionary spending related to the pay freeze and $20 billion reduction in the 2013 cap net of reduced federal government contributions to federal employees' retirement. The decrease in retirement contributions is not accompanied by a reduction in the discretionary caps, so the funds instead "fill in" some of the cuts from the other two policies.}

As we have pointed out before, there are also many other plans out there in the House and the Senate that would replace the sequester. Lawmakers should get moving on coming to an agreement because there are much smarter and less economically harmful ways to reduce the deficit. 

Friday at 11:59 PM, sequestration officially began, triggering sharp across-the-board cuts without much progress on bipartisan replacement plan. Our current debt path is unsustainable and we need to address the deficit, so sequestration is better than nothing even if it is poor policy. But it doesn't address the future drivers of federal spending: entitlement programs.

President Obama Friday called for a balanced approach to put our deficits on a downward trajectory as a share of the economy. Given projections of our debt, Bloomberg View columnist Jonathan Alter argues that even the strongest supporters of entitlement programs should consider reform to strengthen these programs going forward. He argues that reform, contrary to the popular rhetoric, should make these programs sustainable within the context of the budget while ensuring a good return from these programs. The current approach of sequestration hits the discretionary budget too hard, and will reduce government investment and research that will help with our future growth prospects. He writes:

To hold the line on harmful cuts to discretionary spending, Obama and the Democrats must educate the public about the necessity of entitlement reform. Otherwise, the poor and needy -- largely spared by the automatic reductions under sequestration -- will get hit much harder down the road.

Liberals are right to reject Republican proposals that would slash social-welfare programs even as they refuse to consider closing tax loopholes for the wealthy. And I agree that the sequestration will cut into the bone of important government functions and investments in the future.

That makes two more reasons to start talking seriously about how we will pay for the insanely expensive retirement of the baby boomers.

How expensive? Anyone reaching retirement age in the next 20 years (including me) will take more than three times as much out of Medicare as he or she contributed in taxes. By 2030, the U.S. will have twice as many retirees as in 1995, and Social Security and Medicare alone will consume half of the federal budget, with the other half going almost entirely to defense and interest on the national debt. It’s unsustainable.

An approach that doesn't consider any reforms will make it difficult to move forward. Alter uses the example of Social Security, due to become insolvent as soon as 2033, at which point beneficiaries will experience an automatic 25 percent cut in benefits. There are many combinations of reforms that could make Social Security solvent, but once lawmakers start leaving options off the table, agreeing upon a solution becomes difficult.

Today, only the first $110,000 in income is subject to the 7.65 percent tax that pays for Social Security and Medicare. Lifting the cap to higher income levels (say $250,000 or $400,000) could eventually generate hundreds of billions of dollars.

Republicans consider this a tax increase. That’s only true outside the context of these programs. The change could be structured so that no one paid in more than actuarial tables say they would take out. That would still raise billions and be consistent with the idea of paying for your own retirement if you can afford it.

For lifting the cap to have any chance, it would have to be matched by reforms such as adopting the chained consumer-price index, a new way to measure cost-of-living adjustments that Obama apparently favors. Liberals oppose chained CPI because it would theoretically result in lower benefits. But less frequent cost-of-living increases aren’t the same as cuts, especially if the current system is, as many experts believe, based on an inaccurate assessment of inflation.

Indeed, CRFB has discussed a number of ways for tacking the rising costs of entitlements. For Social Security, we have talked about switching to the chained CPI to accurately measure for inflation since it better accounts for consumer substitution among similar goods. For Medicare and Social Security, we have discussed raising the eligibility age. Not everyone will agree with all of the reforms out there, but there are enough good ideas that we should start discussing. If we want to avoid the sharp cuts under sequestration, we should put everything on the table. As Alter concludes, "Maybe there are better ideas for reforming social insurance. The point is, we better start talking about them."

We've written extensively on the chained CPI, which represents both a more accurate measure of inflation and a policy change which would result in substantial deficit reduction. We've shown many of the arguments in favor of this idea and demonstrated that many of the criticism are misguided.

Prior to the fiscal cliff deal, we estimated chained CPI would save about $250 billion over ten years, $290 billion including interest. The CBO has updated its estimate, and it now estimates $340 billion in primary savings -- which would be about $390 billion including interest. Specifically, switching to the chained CPI would save $127 billion from Social Security, $38 billion comes from other programs with COLAs, $51 from other spending programs with inflation calculations (especially health programs), and $124 billion from revenue.

^{Source: CBO, CRFB calculations}

CBO's estimates have changed for a number of reasons, but the largest is the the enactment of the American Taxpayer Relief Act (ATRA). To understand why, it is important to understand how switching to the chained CPI generates revenue. The main reason has to do with the fact the threshold of the tax brackets are indexed with inflation, so "real bracket creep" pushes income into higher brackets as people become richer. Measuring inflation more accurately leads to slightly more real bracket creep.

The ATRA permanently indexed the Alternative Minimum Tax (AMT) exemption to inflation -- pulling tens of millions of taxpayers out of the AMT (where the brackets are not indexed and there is no "bracket creep") and also creating a new "AMT creep" which would be affected by the chained CPI. In additional, the ATRA increased the number of brackets from 5 under current law to 7, meaning that income is "creeping" through more brackets. And finally, the ATRA extended a number of provisions in the tax code which rely on inflation indexing.

Regardless of the budgetary impact, switching to the chained CPI should be done in keeping with the government's goal of measuring inflation as accurately as feasible. Most economists agree that the chained CPI is a superior price index compared to the CPI-U or CPI-W because it better accounts for consumer substitution across similar goods. We expanded on this topic in the paper "Measuring Up: The Case for the Chained CPI."

When you combine the fact the chained CPI is more accurate with the $390 billion of deficit reduction from all areas of the budget and tax code which come from utilizing it, the policy becomes almost a no brainer. Policymakers should enact this change, and should do so as soon as possible.

Tax expenditures have been a hot topic lately as a way to raise additional revenue for a deficit reduction plan that could replace sequestration. Recently, Sen. John McCain (R-AZ) said he would be willing to consider several "revenue closers" (or tax expenditures) in a compromise, and reforming tax expenditures has been proposed by the White House as well.

This isn't surprising given the gains from tax reform. Yesterday, the Center on Budget and Policy Priorities released a new paper from Chuck Marr, Chye-Ching Huang, and Joel Friedman that makes the case for reforming tax expenditures as part of a deficit reduction package. They also go into some specific ways on how it should be done. First, they argue:

Tax expenditures are ripe for reform: they are costly, reducing revenues by over $1 trillion annually, and they are often poorly designed for achieving their desired policy goals. In many cases, there is little difference between benefits or subsidies provided through the tax code and benefits or subsidies provided through the spending side of the budget. So efforts to reduce spending should also address spending in the tax code. Further, tax expenditures tend to provide a disproportionate share of benefits to households higher up the income scale.

Of course, one would find very few economists and tax experts who would disagree with that statement. So what should be done about it?

The authors group their preferred solutions into two types. The first is a broad-based limitation on tax expenditures, similar to ones we talked in a recent paper on raising revenue from high earners. Specifically, they mention limiting the value of deductions and exclusions to 28 percent, limiting the amount of deductions a taxpayer can take, and limiting the value of certain tax expenditures. All three methods would likely represent progressive changes to the tax code -- although that would depend on the design -- but CBPP prefers the first option, since it would maintain incentives at the margin for preferences involved with these limits. We have also talked about ways in which marginal incentives could be preserved in the other two limits albeit at the cost of reduced revenue.

The second solution the CBPP discusses is closing loopholes or reducing tax expenditures that allow high-earning taxpayers to substantially reduce their tax burdens. They discuss in more detail five of these tax provisions:

• Carried interest: Private equity fund managers typically receive a management fee plus 20 percent of the fund's profits (the latter being "carried interest"). The fee is taxed as ordinary income, but the carried interest is taxed at lower capital gains rates. Many analysts would argue that the carried interest is more like ordinary income, since it is compensation for managing a fund rather than the return on capital that the manager has invested.
• Like-kind exchanges: Like-kind exchanges are a way to defer capital gains taxes. If a property is held for business or investment proposes, it can be exchanged for similar property, hence the name "like-kind exchange." For example, almost all land exchanges can qualify as like-kind even if they have very different values. Thus, these exchanges can function as a way of avoiding paying capital gains taxes.
• Valuation discounts: Valuation discounts are used to reduce estate tax liability. They reduce the value of assets that are hit by the estate tax by placing temporary restrictions on their usage. This depresses the value of those assets for estate tax purposes while eventually allowing heirs to make full use of the assets at a later date.
• S corporation loophole: S corporations are a form of corporation that does not pay the corporate income tax; rather, it passes through the income to its owners, who are then taxed at the individual income tax. However, these profits are not hit by payroll taxes. S corp owners are supposed to report "reasonable compensation" to themselves, income that is subject to payroll taxes, but this rule has not seemed to adequately serve its purpose. Proposals to close this loophole would instead subject both compensation and S corporation profits to payroll taxes.
• Inside buildup: Cash value life insurance is a type of life insurance that not only pays out death benefits, but also invests premium payments to build up investment earnings. This "inside buildup" is not taxed until the policy is cashed out and may actually be never taxed if the proceeds are paid out upon death or if they are used to pay the policy's premiums. These provisions offer a distinct tax advantage to these type of life insurance policies.

The authors also mention other provisions, such as international tax loopholes and the tax treatment of derivatives that could be targeted. Many of these options are also ones we highlighted in our large table of revenue-raising options.

We agree with CBPP that tax expenditures should absolutely be part of the discussion. Many of these tax breaks make the tax code complex, economically distortionary, and unfair. There is certainly a lot of room for reform in both the ways they described and in other ways, such as reforming the largest tax expenditures in the code.

We have been working our way through the “15 Ways to Rethink the Budget” report from the Brookings Institution’s Hamilton Project. Previously, we covered their defense proposals, reforms to Medicare, and tax expenditure proposals. In this post, we will examine a paper that takes a look at the Social Security Disability Insurance system, particularly the misaligned incentives for employers and state governments to discourage disabled individuals from continuing to work when possible and its underinvestment in the administrative capacity of the system.This paper offers two groups of proposals for cutting costs in the DI system that also have the potential to improve outcomes for beneficiaries. These, along with policies proposed by CRFB Senior Policy Director Marc Goldwein, should definitely be on the table as part of disability reform.

Background: What’s Wrong With the Disability Insurance System

Jeffrey Liebman of Harvard University and Jack Smalligan of the White House Office of Management and Budget (OMB) explain that disability insurance is a costly program because it attracts older but pre-retirement age individuals much more so than it does younger workers or those who are eligible for Medicare and the old-age portion of Social Security. As the baby boom generation moves into the latter two programs, the CBO does estimate that DI spending will fall by 0.1 percent of GDP over the next decade.

Regardless, the DI program in its current form is not delivering what beneficiaries need. Essentially, the program offers beneficiaries lifetime cash benefits in exchange for them agreeing not to do substantial work again. The number of people who go on the DI rolls for the rest of their lives has grown in recent years due to changes in low-skill labor markets and a decline in other forms of public assistance. The authors also point out issues with the program’s misaligned incentives, distortion of labor supply, and a disability determination system that moves slowly, forcing beneficiaries to endure long waits for decisions and generating a backlog of applications. 

To resolve the issues with the DI program, Liebman and Smalligan advocate focusing on demonstration projects and providing new tools for a newly appointed Social Security commissioner.

Policy Recommendation 1: Demonstration Projects

Under the category of demonstration projects, they emphasize the need for early intervention with DI beneficiaries, pointing to research that has shown that after someone starts receiving benefits or even begins the application process, it is often too late to get him or her back in the workforce.

One such project that they suggest involves screening the applicant pool for individuals who probably could go back to work and offering them temporary cash benefits, wage subsidies, and other support in exchange for withdrawing their DI applications. This would lessen the need for long-term costs that result from individuals going on DI for life who would otherwise still be able to work.

The authors also note the value of early intervention projects targeted to states and employers, calling for empowering states to reorganize funding streams in order to target populations who are at risk of going on DI permanently with programs that reduce the likelihood of their becoming dependent on disability insurance payments. In order to create an incentive for employers to keep workers from resorting to disability insurance quickly, they propose replacing federal disability insurance with mandatory private disability insurance for the first two years that an individual receives benefits and creating an experience rating system for benefits payments similar to that used in the unemployment system.

Policy Recommendation 2: New Tools for the Social Security Commissioner

The tools that Liebman and Smalligan call for the new Social Security commissioner to have are aimed at eliminating the current problem of underinvestment in the administrative capacity of the disability system, in part by making the Disability Determination Services (DDS) program a mandatory, rather than discretionary, expenditure. They note that actuaries have estimated that every dollar spent on disability determination reviews saves $9 in benefits expenditures in the future, which is a clear argument for avoiding the kind of backlog of applications that has built up lately.

Looking Forward

The Brookings report closes with a three-part case on why now is the time to act on DI reform. The need for deficit reduction has brought entitlement reform issues to policymakers’ attention. The new presidential term and the appointment of a new Social Security commissioner provide the chance for a fresh start. Finally, the DI trust fund will be exhausted by 2016, at which point benefits will be cut automatically by 20 percent, so something needs to be done before then. Liebman and Smalligan argue that they present a set of measures that will save money and also help beneficiaries either get back to work or have their claims resolved more efficiently if working is not an option. If this is true, following their recommendations would be a wise step to both safeguard our fiscal health as well as better serve the beneficiaries of the disability program.

CRFB has previously written about the importance of addressing the DI program and not resorting to a transfer from other parts of the Social Security budget in order to fund it when its trust fund runs out in 2016. The logic is straightforward: we need to either reduce the benefits that the DI program pays out, or increase its revenues. Liebman and Smalligan’s report advances a proposal that minimizes the benefits that must be paid out in the years to come without depriving beneficiaries of the support that they need.

We've talked a great deal about how sequestration is bad policy, but that the worst outcome would be to cancel the sequester without offsets. In the Fix the Debt Campaign's new sequester deal scoring system, that is the option that would receive their "F" grade. In a recent article at Forbes, CRFB board member and former Representative Bill Frenzel (R-MN) explains why lawmakers should not kick the can down the road, despite the sequester's drawbacks.

Frenzel agrees that the sequester is a less than ideal way to reduce the deficit: it doesn't address the drivers of the federal debt and doesn't distinguish between good cuts and bad cuts. But it does have value as a way to bring both parties to the table. Frenzel explains:

The worst feature of the sequester is that it is the wrong way to reduce spending. The cuts are mandated across-the-board in most discretionary spending areas. The good programs will be cut along with the bad. The most hard-hit casualty will be the Defense Department (DOD). It can stand cuts, but they need to be carefully selected. The sequester does not select. The sequester meat-axe slices muscle along with the fat.

It is hard to believe that allegedly smart people could have agreed to such a device. The President and the leaders of both houses signed off on the sequester in the belief that because it was so bad it would force them into a compromise deficit/debt reduction plan despite their philosophic disagreements.

As it seems to be turning out, our representatives’ philosophic disagreements are more precious to them than the health of the nation’s economy. Republicans want to protect tax rates and Democrats want to protect entitlement programs. They would prefer the sequester, admittedly smaller than the tax cliff, to any form of compromise.

The moment of truth is only a week away. Most odds-makers believe the Sequester will actually occur. However, the policymakers do have other choices: (1) they could postpone it, in hopes of making a later deal (2); they could trash the sequester, and sacrifice long-term growth for another short-term fling; (3) they could give the Executive Departments leeway to make the cuts where best tolerated; or (4) they could live with the sequester for a few weeks or months, and then holler “uncle” and opt for (1) , (2), or (3) above.

But Frenzel argues that despite sequestration's limitations, it will force lawmakers to do something about our unsustainable debt problem. Lawmakers have a clear incentive to replace the sequester with smart deficit reduction, but should they fail to compromise, it's better than nothing. Frenzel writes:

This writer believes that the sequester will happen. However, when airport security lines triple, the national parks open later and close earlier, and our military tours abroad are extended, there is a good chance that Congress will begin to rethink the problem, particularly with respect to DOD. If so, at that point, it is critical that Congress replace a dumb cut with a smart cut of equal value, rather than deferring or repealing the sequester.

Our debt is already high. CBO sees it going higher rather than stabilizing under the most likely budget scenarios over the next 10 years. The President’s budget drives the debt ratio up around 80% in 10 years. That’s one reason why cancelation, or deferral, of the sequester would be unwise. Over 10 years, the sequester would save well over $1 trillion. Another reason is that it makes no sense to swap short-term faster growth for long-term reduced growth.

If no comprehensive compromise (one with total 10-year reductions of Bowles-Simpson proportions) is in sight, it is better to accept the stupid cuts of the sequester than to postpone deficit/debt reduction plans again. The best plan would be smart cuts. The sequester is a distant second choice, but, clearly, it is better than nothing.

The full blog post can be found here.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

As promised, the Brookings Institution's Hamilton Project has released the remaining papers in its series "15 Ways to Rethink the Budget." We will be discussing the papers a series of blog posts. We covered two defense proposals on Friday, and next we focus on their Medicare proposals which affect both beneficiaries and providers in the program.

The first proposal comes from MIT economist Jonathan Gruber in a paper on "Restructuring Cost Sharing and Supplemental Insurance for Medicare." Gruber describes the value of his proposal as follows:

Traditionally, efforts to control the costs of the Medicare program have focused on the “supply side,” changing the method and amount that Medicare pays its providers. There has been much less focus on the “demand side,” using financial incentives to encourage less medical spending by enrollees....Yet efforts both to improve the value of the Medicare program for beneficiaries and to lower its costs to the government would benefit from some focus on the demand side.

Gruber describes the current cost-sharing system in Medicare as "both variable and uncapped, with an overall structure that is hard to rationalize." The confusing nature of Medicare's cost-sharing and the potential for unlimited costs to beneficiaries has led the majority of beneficiaries to seek supplemental insurance, which has been shown to increase over utilization and consequently Medicare spending.

Thus, this proposal seeks to improve cost-sharing through changes to Medicare and supplemental insurance, somewhat similar to what the Simpson-Bowles proposal did. First, Gruber builds upon a 2008 CBO option that would replace current cost-sharing rules with a single combined deductible of $525, a 20 percent coinsurance rate, and a $5,250 out-of-pocket (OOP) maximum. Instead of a $5,250 OOP maximum, Gruber proposes instituting a progressive out-of-pocket limit on payments. The limit would be a sliding scale fraction of the Health Savings Account limit based on the beneficiary's income, going from one-third of the HSA limit ($1,983) for people making between 100 and 200 percent of the poverty line to the full HSA limit ($5,950) for people making over 400 percent. In addition, he proposes reducing the deductible to $250 for seniors below 200 percent of poverty.  Second, to address the supplemental insurance issue, he proposes an excise tax of up to 45 percent on premiums for Medigap plans and employer-sponsored retiree coverage (for those over 65). Gruber roughly estimates the proposal would save about $125 billion over ten years, although he acknowledges this depends on the exact level of the excise tax and other uncertainties.

The second Medicare proposal, "Transitioning to Bundled Payments in Medicare," from Harvard Medical School's Michael Chernew and USC's Dana Goldman focuses, as you would expect, on the provider side of the equation. The paper proposes reforming Medicare's payment system to align provider incentives with efficiency and quality of care. They describe the problems with the current system as follows:

The existing FFS portion of Medicare, which enrolls almost 75 percent of Medicare beneficiaries, relies on a byzantine system of fee schedules. There are thousands of codes for different services; setting the appropriate fee is enormously complex. Mispriced fees create incentives leading to the overuse (or underuse) of medical services. As a result, resources flow to overpriced activities and infrastructure. Importantly, the FFS system reduces incentives for providers to be efficient over the entire episode of care (Chernew, Frank, and Parente 2012; Landon 2012).

To address these issues, Chernew and Goldman would create a global payment model within Medicare, which would involve paying provider systems or Medicare Advantage plans a fixed per beneficiary payment to cover all medical services. While the level of these payments can be dialed, they recommend as a default setting them equal to current law Medicare spending (which would be $100 billion lower than current policy spending). In addition, they suggest creating as much regulatory neutrality as possible between Medicare Advantage (MA) plans and Accountable Care Organizations (ACOs). Such neutrality would involve allowing ACOs to act like MA plans in controlling benefit design and charging above benchmarks for higher quality plans (to attract beneficiaries). Finally, they would drop various fee-for-service regulations (i.e. self-referral rules) for providers who accept global payments, since efficiency gains under a global payment model would eliminate the need for them.

Both proposals are welcome ideas that not only have potential for savings, but could modernize Medicare to operate more efficiently. Success in containing federal health care spending depends on making Medicare more efficient to encourage higher value.

Sequester Week – It’s all about sequestration this week as the March 1 deadline for the $85 billion in across-the-board cuts looms (read all about the sequester here). The deadline at the end of the week is the culmination of a chain of events begun a year and a half ago with the Budget Control Act (BCA). The BCA avoided a national default by raising the debt ceiling in exchange for some spending cuts and mechanisms to ensure further deficit savings, including sequestration. The reasoning was that the sequester would be so unpalatable to both parties, with abrupt spending cuts equally divided between domestic and defense spending, that lawmakers would seek a deal on a more thoughtful and comprehensive approach. That logic failed both when the Super Committee was unable to come up with a plan to replace the sequester and at the beginning of the year when the deadline for the sequester was delayed for two months. The sequester is a symbol of the failure of our leaders to compromise and work together in the best interests of the country. The Fix the Debt Campaign has a handy report card you can use to grade the performance of our policymakers.

All Quiet on the Sequestration Front – Congress is back is in session this week, but policymakers are by no means exhausting themselves in trying to avoid the cuts from taking effect. While Washington has become quite adept at averting disaster at the last minute, every indication at the moment is that sequestration will take effect on Friday even though everyone wants it replaced. With no deal in sight, there are plans to vote on Democratic legislation that will replace the sequester with an even mix of spending cuts and additional revenue and a Republican bill to give agencies more flexibility in carrying out the sequester. Neither measure is expected to garner support from the opposite party. Alan Simpson and Erskine Bowles also put forth a plan for $2.4 trillion in deficit savings that could replace the sequester last week.

On to the Next Deadline – Though they don’t realistically plan to solve the sequester by Friday, policymakers are already looking ahead to the next fiscal deadline. On March 27 the stopgap measure funding federal operations will expire and the federal government will shut down unless agreement is reached. Lawmakers have all but given up on enacting a comprehensive budget blueprint for the rest of the fiscal year, but they will want to agree on another stopgap measure to prevent a shutdown. The battle will be over spending levels, as in if the sequester is reflected or not, and what kind of flexibility federal agencies will have in making cuts to meet the sequester. Currently, agencies have little flexibility in deciding what gets cut and what doesn’t, but a new continuing resolution could re-assign those cuts. There are lots more fiscal speed bumps down the road, as illustrated by our infographic.

Stating the Case – President Obama is on the road making the case for his approach to replace the sequester with a mix of spending cuts and revenue increases, with a White House spokesman saying the spending cuts to revenues ratio for a sequester replacement could be 2 to 1. To make the case that sequestration will be harmful to Americans, the White House released fact sheets on how sequestration would affect each state and the District of Columbia. The Administration is also urging state governors to pressure lawmakers to avert the sequester.

No Hiding Fact the Debt Must Be Addressed – A new academic paper indicates that the U.S. may soon reach a point where the national debt seriously impairs the economy. The research implies that debt at 80 percent of the economy could result in a "debt trap" of spiraling interest rates and interest payments to service growing debt. At the same time, a recent survey of economists suggests that a comprehensive debt plan that involves all parts of the budget could boost the economy in 2014.

Lew Committee Vote This Week – The Senate Finance Committee will vote on the nomination of former Office of Management and Budget director Jacob Lew to be treasury secretary on Tuesday. The nomination is expected to go through and Lew will be a key player in the upcoming budget battles.

Key Upcoming Dates (all times are ET)

February 26

• Senate Finance Committee hearing on the CBO 2013 Budget & Economic Outlook at 10 am as well as an organizational meeting and vote on Jacob Lew to be Treasury Secretary.
• Senate Budget Committee hearing on the impact of federal investment on people, communities and long-ter meconomic growth at 10:30 am.

February 27

• House Armed Services subcommittee hearing on the impact of budget constraints on military end strength at 2 pm.
• Senate Aging Committee hearing on streghtening Medicare for today and the future at 3 pm.

February 28

• Bureau of Economic Analysis releases second estimate of 2012 4th quarter and annual GDP.

March 1

• Across-the-board cuts to defense and non-defense discretionary spending prescribed in the Budget Control Act, known as "sequestration," will take effect.

March 8

• Dept. of Labor's Bureau of Labor Statistics releases February 2013 employment data.

March 15

• Dept. of Labor's Bureau of Labor Statistics releases February 2013 Consumer Price Index data.

March 27

• Current continuing resolution (CR) funding the federal government expires.

March 28

• Bureau of Economic Analysis releases third estimate of 2012 4th quarter and annual GDP.

April 5

• Dept. of Labor's Bureau of Labor Statistics releases March 2013 employment data.

April 15

• Congress must pass a budget resolution as specified in the Congressional Budget Act. Also, due to the debt ceiling suspension bill, lawmakers will have their pay withheld after this date until their respective chamber passes a resolution.

April 16

• Dept. of Labor's Bureau of Labor Statistics releases March 2013 Consumer Price Index data.

April 26

• Bureau of Economic Analysis releases advance estimate of 2013 1st quarter GDP.

There has been a lot of talk about the sequester in recent weeks as the latest in a long line of fiscal stand-offs ensues in Washington. In FY 2013, the sequester will hit defense budget authority by $43 billion, non-defense discretionary budget authority by $26 billion, Medicare spending by $11 billion, and other mandatory spending by $5 billion. 

The chart below from the New York Times shows that while the cuts themselves are significant, a good deal of spending is excluded from sequestration, especially spending on entitlement programs. We need to do something about our unsustainable budget and the sequester is better than nothing, but almost everyone agrees that the sequester is a dumb way to reduce the deficit. It includes severe cuts up front that would harm the economy, hinders the federal government's ability to provide basic services through across-the-board cuts, and does not address the drivers of our long-term debt.

^{Source: New York Times}

Scott Lilly of the Center for American Progress points out another way in which the sequester cuts are not smart: in some cases, the cuts may increase the deficit. For one, the sequester's hit to the economy would depress revenue and increase spending on countercyclical programs (although the effect would most likely not wipe out the initial savings fully over ten years). Lilly further points out that the economic contraction may actually be bigger than anticipated, since the sequester may have further ripple effects beyond what a simple multiplier analysis would indicate. For example, cuts to the Federal Aviation Administration (FAA) could lead not just to fewer jobs at the agency and related effects, but it also could hurt the airline industry by reducing the number of flights that they can operate. This kind of disruption is not typically experienced with other kinds of cuts.

Also, because of the way some of the affected spending works, some cuts may actually have no impact or even a negative impact on the deficit. To use the FAA as an example again, since the sequester cuts could reduce the number of flights and the FAA is largely funded by user fees collected on a per flight basis, the agency's savings from the budget cuts would mostly be erased by losses in revenue. This would be a worst of both worlds result -- disrupted service with little or no savings to show for it.

Other examples of counterproductive cuts include the IRS and the Center for Medicare and Medicaid Services (CMS). The IRS, of course, is responsible for collecting revenue, so cuts to their budget would result in less revenue collection, likely an amount that is greater than the initial cuts. We've seen that the reverse is true with the Senate version of the Budget Control Act, which increased funding for the IRS by $14 billion over ten years and was scored as increasing revenue by $44 billion (a net $30 billion gain). In the case of CMS, they preside over an enormous budget that will shrink only a little -- Medicare will be cut by 2 percent and Medicaid is exempt -- while their own budget will shrink by 9 percent, according to Lilly. And even if the size of Medicare payments is smaller, the number of payments CMS must process will not shrink. As a result, it is quite possible that the increase in improper payments would swamp the initial savings from cutting CMS's budget. As you can imagine, there are plenty of other examples of sequester cuts which would hamper agencies' abilities to maintain budgetary discipline.

Clearly, the sequester is not a smart way to reduce the deficit, but that does not mean it should be repealed without offsets--that would be a clear step back in the effort to get our budget on a sustainable path. Instead, lawmakers should make much smarter choices by working to get our debt under control with more gradual changes. This plan should also go much further than the sequester and tackle the long-term drivers of our debt so that, unlike the sequester, it can make our long-term fiscal future much brighter. Lawmakers should take advantage of this moment and enact a smart deficit reduction plan as a replacement, as described in Fix the Debt's report card. The sequester debate is an opportunity as much as it is a problem.