Airline profits are soaring but passengers feel squeezed. We explore the economics of flying as the busy summer travel season takes off.
Sweeping federal budget cuts known as the “sequester” were set to go into effect on March 1. We talk with congressional leaders engaged in the debate over federal spending and analyze what’s at stake for the Washington region.
- Donald Kettl Dean, School of Public Policy, University of Maryland; nonresident senior fellow, Brookings Institution
- Danielle Kurtzleben Business and Economics Reporter, U.S. News & World Report
- Frank Wolf Member, U.S. House of Representatives (R- Virginia, 10th District)
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. On Friday President Obama officially authorized $85 billion worth of federal spending cuts for this fiscal year and more than a trillion dollars in cuts for the next decade. They fall unevenly around the country, but they hit the Washington region squarely in the face.
MR. KOJO NNAMDIIf a budget agreement is not met in the coming weeks, hundreds of thousands of federal workers and civilian contractors in our area could be looking at furloughs. More than $40 billion is coming out of the Pentagon this year alone and places like the National Institutes of Health, a major employer in suburban Maryland, are set to be cut by $1.5 billion.
MR. KOJO NNAMDIThis hour we'll be measuring the impact of life under the sequester in our region and connecting with members of Congress, fighting on the frontlines of the debates over federal spending set to play out in the weeks ahead. Indeed, joining us now is Frank Wolf. He is a member of the U.S. House of Representatives, a Republican from Virginia. He joins us by telephone. Congressman Wolf, thank you for joining us.
CONGRESSMAN FRANK WOLFSure. Thank you very much for having me. Thank you.
NNAMDIThe New York Times laid out a very bleak picture for Virginia in yesterday's paper. Nearly 100,000 civilians working for the Pentagon and the Commonwealth could be looking at furloughs. Some economists say the sequester is likely to send Virginia straight into a recession. What do you say?
WOLFWell, it very will be difficult. I think we have yet to see but I think you have to operate on the premise this is going to be tough not only for Virginia but for all the states that have a heavy defense element and also states where there are a large number of federal employees. But it hits almost equally between defense and nondefense I think, because Virginia has so many paces it probably hits us in both ways.
WOLFThere is a way to deal with this and it's a way that a group of us tried to about a month ago. We only had 74 votes, and that is to pass something along the lines of the Simpson-Bowles Commission. Simpson-Bowles negates or eliminate any need for sequestration because as you know, and I'm sure you've probably done programs on it, for every $1 of revenue you bring in by closing tax loopholes and doing all those different things, you can, in essence, even lower the rates, but you're going to close on, like, the electronic game industry gets a lot of tax breaks. So you could go on and on.
WOLFYou then have $3 in reduction of spending. But we had 74, 75 votes, people from both parties, but certainly not enough to pass it. And if you don't do something like that, Kojo, we're going to go from crisis to crisis. And I think what we're having now is we're having a fatigue. I mean, it's like every 30 to 60 days we have another crisis. So if you just deal with this to take care of it for the next two months or for the next ten months, you're going to go through the next January and February having the same type of a problem. And I think you got to do something bold to deal with it.
WOLFNow Simpson-Bowles has some tough parts in it and I do support Simpson-Bowles, so I support these things. It calls for the reforming of Social Security. When I...
NNAMDIWhen you bring up Social Security, members are already kind of hesitant about touching an issue like taxes...
WOLFWell, but I think you -- yeah, but whether they're Republican or Democrat they're going to have to deal with this issue. Our nation is facing a future that could be very grim if you do not. And let me tell you what the future is but also to what it does and why it can be done. In 2022, Kojo, every dollar that comes in to the federal government will go for the Medicare and Medicaid, Social Security or interest on the debt.
WOLFRight now we pay out 4 billion, "B," billion dollars a week in interest payments. In 2022, 2021 it gets up into the 9.5, $10 billion a week. We get no money for it -- we get nothing for it. A large portion goes to China...
NNAMDISo you're saying, Mr. Congressman, that as...
WOLFBut if I could just cover what I think in Simpson-Bowles which people think is so difficult. When I go in the high schools, I ask the kids, do you believe the Social Security system is sound or be there when you retire? In the last four years, not one student from the Shenandoah Valley to McLean have raise their hands. Simpson-Bowles says if you're 51 and above, there's no change. If you're 50, you're going to have to work another month. If you're 40, you're going to have to work another six months all the way down. If you're 18, you're going to have to work another two years.
WOLFBut that saved the system for people that are currently on it and for future generations. And so given a choice of doing something that may be viewed as difficult in order to save it so it's there from when you retire, your mom and dad retires and your kids retire, that's worth doing. And I think there's no other way.
NNAMDIWell, you've answered my next question in a way because I was about to suggest that for so many of your colleagues, Social Security may be politically radioactive. What you have just done is present it in such a way in which you think it will not be politically radioactive if we talk about to younger people in more practical terms. That's what you seem to be saying.
WOLFWell, I think so. If you just say, do you want to make a change, the Social Security people are going to say no. If I then tell you in two years from now that disability -- Social Security disability goes bankrupt, runs out of funds in two years from now, 2014 -- late 2014 and 2015, somewhere in that area -- if I tell you that and -- I mean, that's going to make everyone really concerned. So I don't think we can run and hide from it.
WOLFMy wife and I -- we have five kids, I have 16 grandkids. We can't run and hide. And now we're at a situation, Kojo, there is no easy answer out.
NNAMDIWe're talking with Congressman Frank Wolf. He's a member of the U.S. House of Representatives. He's a Republican from Virginia. If you'd like to join the conversation, call us at 800-433-8850. If you have already called, stay on the line. We will get to your call. We just have a few more questions for the Congressman. You've gone to bat for federal workers against members of your own party repeatedly, most recently over votes to freeze their pay. You've said federal workers are an easy target who don't present much of an opportunity for meaningful spending reform anyway. Why not and what is meaningful reform to you?
WOLFWell, this is the third year that they will be frozen. I mean, you're freezing Dr. Collins who's coming up with some of the leading technology on cancer research. You're freezing people at NIH that's working on Alzheimer's. You're also freezing the salary of FBI agents that are working, you know, 10, 12 hours a day, six days a week. The people that were involved in the Benghazi attack, they were all federal employees.
WOLFI just got back from Lebanon last week. The danger to the people that are on the American embassy compound is very dangerous. To say that that's the way you're going to solve it -- I mean, the space program. The astronauts that you're going to put on a rocket to send out to a space station are all federal employees. And this will have been the third year. And so why would you not deal with reforming Social Security? Why would you not be dealing with some of the others?
WOLFAnd it just doesn't make any sense. So that's why I think -- and we want these things to run well. We want it to be the best FBI, the best space program. We want to have the best doctors at NIH that are working on cancer research and breast cancer and Alzheimer's. And so this would be the third year. And Dr. Collins -- and I heard it on entry, you mentioned NIH -- Dr. Collins could leave the NIH today and probably triple his salary.
WOLFBut he doesn't do it because he's a committed person and you'd find the same thing -- so to do it three years straight and not deal with some of the other things I think is wrong. I think federal employees have given enough. Why don't you try to reform Social Security? Why don't you do some of these other things?
NNAMDII was going to ask you next about the likely effects of sequestration in your district, but Mark in Herndon, Va. seems to have an opinion and maybe a question about that. Mark, you're on the air. Go ahead, please.
MARKHi. Thanks for taking my call. I'd just like to say this, that the Republican Party has been pushing for, you know, alignments of income, taxes and spending and so forth. And, you know, Representative Wolf, he had pushed this, to some extent, for improvements, you know, for the federal workers, etcetera. But the push that his party has taken is really so detrimental to Virginia -- and I've been in Virginia on and off all my life -- the effects of the sequester both locally and statewide -- and I'm in northern Virginia -- is going to be devastating.
MARKAnd really the alignment that Representative Wolf has is not really for the people of Virginia. And I just say that, you know, if you want to support the people of Virginia, he's really got to do some work within his own party, which in my opinion, and my opinion only, has pushed us towards this brink. And I believe the Republican Party is happy to have the sequester take place because it gets to their goal, which is to shrink government down to the size you can drown it in a bathtub.
WOLFMay I respond to that?
NNAMDIOf course you may.
WOLFOne, I think he's absolutely wrong, number one, I'll put it at this. Two, the answer to save the country is the Simpson-Bowles Commission. Three, I've been opposed to sequestration. I'm the only member of the Congress now who published my entire vote on every vote that I've cast. And so everything he said was inaccurate, everything. I mean, I think truth of the matter is everybody can have their own facts, but how you determine them -- I have fought sequestration.
WOLFThat's why we offered the Simpson-Bowles Commission. I'm one of the few members -- I've never taken the so-called Grover Norquist tax pledge. And I think what I've done is try to do what's best for the country. You got to pay down the debt, deal with the deficit. While that person was speaking -- I assume he was speaking for maybe five or ten seconds -- every second that he was speaking we added $37,000 to the debt and the deficit. And so I think the proposal -- and the proposal that I've offered is bipartisan. We had two Republicans and two Democrats. It is the only bipartisan proposal out there that really deals with that.
WOLFIt helps everybody in the country. It puts everything on the table, brings in $1 of additional revenue for $3 of spending reductions. The spending reductions come by reforming, I told them and I said, by doing that, we can have a renaissance in this country. So sequestration is -- doesn't make sense.
WOLFSecondly, let me just differ with the gentleman here. He said the Republican Party -- sequestration was the idea of the White House. The Obama White House, Jack Lew supported this. He must read the papers and saw Bob Woodward's comments. Secondly, if you looked at the third debate, the president said sequestration will not take effect.
WOLFIf President Reagan were the President of the United States -- I came here with Reagan -- Reagan and Tip O'Neill, I don't know that they loved each other, got along wonderful, but they talked to each other. And if you recall when President Reagan was shot, Tip O'Neill went to the hospital and prayed for him. President Reagan came up here and met with Tip O'Neill. Tip O'Neill went down to the White House.
WOLFYou got to sit down to one another together to kind of deal with the issue. So one, the guy who called in was wrong. Two, I think the offer that we're seeing for Simpson Bowles is the right way to go. And thirdly, you got to compromise. My best friend in Congress is a Democratic member, Congressman Tony Hall. We used to say to each other, we could just sit down and resolve these issues. You have to sit down and talk with one another.
NNAMDIThank you very much for your call, Mark. Congressman Wolf, we're running out of time, but Mark used the term devastating about the effects of the sequestration...
WOLFSequestration will be very bad. That's why a group of us offered before sequestration came in, effective Simpson-Bowles. Simpson-Bowles takes care of sequestration. Also, Kojo, it's important, some of the ideas floating out there only take care of sequestration for two months. Some take effect for the next year. Simpson-Bowles eliminate sequestration for the next ten years. Sequestration will stop and never take place again.
NNAMDICongressman Frank Wolf. He's a member of the U.S. House of Representatives. He's a Republican from Virginia. Congressman Wolf, thank you for joining us.
WOLFThank you very much, Kojo.
NNAMDIWe're going to take a short break. When we come back, we will continue this conversation both on the likely effects in this region economically and the politics of sequestration. I'm Kojo Nnamdi.
NNAMDIWelcome back to our conversation about sequestration. We're inviting your calls at 800-433-8850 or you can send email to email@example.com. Joining us by telephone is Donald Kettl. He is dean of the School of Public Policy at the University of Maryland. He's also nonresident senior fellow at the Brookings Institution. Donald Kettl, thank you for joining us.
MR. DONALD KETTLIt's great to be with you, Kojo.
NNAMDIAnd joining us in studio is Danielle Kurtzleben. She is a business and economics reporter for U.S. News and World Report. Danielle, thank you for joining us.
MS. DANIELLE KURTZLEBENGood to be here.
NNAMDILet's consider for a moment the economic impact of the sequester. You wrote last week about the chairman of the Federal Reserve, Ben Bernanke, and how he'd been urging lawmakers to do everything they could to avoid sequestration. What are his specific worries about how the cuts could hamper the economy which is still struggling to move forward after the prolonged recession?
KURTZLEBENRight. Well, you've hit the nail on the head right there. That is his worry. I don't think Ben Bernanke or a lot of economists would say that the country can continue on its current debt and deficit path. That, in and of itself, is an economic problem. But what he told lawmakers was please, yes, do cut deficits, do cut debt but don't do it so immediately and so abruptly. You have to ease into it. Why? Because the economy is still limping along from recovery.
NNAMDIAnd if they do it too drastically that means it can have an adverse effect on the economy that a limp could in fact become a crawl and a crawl could become no motion at all or a backward motion.
KURTZLEBENRight, yes. And there are a lot of -- there are a lot of estimate out there of exactly how much it could hurt GDP. You have a lot of people who say, it's not going to lead to recession in and of itself. But it certainly doesn't help.
NNAMDIWhat sense do you have right now for whether the economy is still growing? A report in January scared a lot of people when it suggested the economy may have shrunk in the fourth quarter. That did not turn out to be the case but it made a lot of us nervous.
KURTZLEBENRight, absolutely. And, you're right, they just revised that last week or early this week. And so the economy is still sort of limping along. A lot of economists say GDP growth is still at around 1.5 to 2 percent, give or take. But that is still not very exciting growth. I mean, really a lot of people would say much healthier growth, especially post recession, that it should be 3 or 4 percent.
NNAMDIDon Kettl, what are the impacts you're going to be looking at most closely? You told the Baltimore Sun this weekend that we might not see the earliest impacts of the sequestration until early or mid April?
KETTLNo, that's exactly right, Kojo. And what we have is something that's going to roll itself out very gradually. In fact, some federal agencies have already begun cutting back on contracts and spending. The furloughs and other kinds of hiring effects in all likelihood won't take effect until the early part of April at the very, very earliest because there's a 30-day notice period that's required before federal employees can be furloughed. And then after that there's the gradual process of cutting back contracts and other kinds of federal spending.
KETTLIt's going to take a long time to roll this out. And because of that it's going to be a little bit difficult to figure out exactly what the impacts are going to be. But there are going to be some air traffic control towers that will be shut down. There will be some food inspection services that will be rolled back.
KETTLBut especially for those of us in this area, the thing really to watch out for is the impact on the economies of the district in Virginia and Maryland, where every federal employee who has a day of furlough has that much less money to spend in the supermarket, to spend in the shopping mall, to buy new cars or new homes with. And that's going to affect the -- all the people who spin off of that, and the state economies and the state budgets that spin off of that in addition.
NNAMDIDon, what does a worst-case scenario look like for Maryland in your view?
KETTLThe worst case -- and heaven forbid this should happen -- but the worst case would be just at precisely the moment when the state budget was really beginning to turn around, the prospect of sequester could take a fair amount of money out of the state treasury, could reduce state income and sales taxes, could make what seems to be a pretty good budget situation into a fairly desperate one in fairly short order. And then on top of that could create some real pockets of difficulty in the areas that were fairly well insulated from the first round in the economic distress.
KETTLPeople -- places where there are lots of federal employees could suddenly find themselves in not very happy shape. So it's the situation as we look three, four, five, six months out that we really need to be concerned about.
NNAMDI800-433-8850 is the number to call. Congressman Wolf is no longer with us, so if you had a specific question for him he will not be able to answer it. However, you may have other questions. What sense do you have for how the sequester is likely to affect your life in the Washington region? Are you or anyone else in your family looking at a furlough? Are you a federal employee or a contractor who's going to be effected by the sequester? How are you planning to deal with the prospect of a furlough or a pay cut, 800-433-8850? If the lines are busy send us email to firstname.lastname@example.org or send us a Tweet at kojoshow.
NNAMDIDon, if the earliest impacts of the sequester won't be felt for another month or so, how will that effect the debate over the next several weeks about avoiding a government shutdown? Surely the psyche of lawmakers on The Hill would be different if people were already feeling the worst effects of the sequestration.
KETTLThat's right. We're actually in a place where we've never been before. And the reason is that usually we've had these enormous crises where the prospect of shutting the federal government down, that's just about happening right now. We have this next deadline coming up on March the 27th where the federal government runs out of money but as best we can tell, there's simply no appetite anywhere in Washington for coming at this problem yet again.
KETTLSo the most likely thing seems to be that the sequester will be locked in. The federal government will continue. Republicans and Democrats and the Congress and the president will say, let's just see what we can agree on elsewhere and try to find some way of papering this over in the short term. Come back when we deal with the national debt crisis later in the summer and hope we can just coast through this in the meantime. But what that really means is that the sequester is likely to be a reality that's going to be with us for some time now.
NNAMDIIn case you're just joining us, we're talking with Donald Kettl. He is dean of the School of Public Policy at the University of Maryland. He's also nonresident senior fellow at the Brookings Institution. He joins us by phone. Joining us in studio is Danielle Kurtzleben. She is a business and economics reporter for U.S. News and World Report. Danielle, it's not like the United States is the only country grappling with the dueling problems of kick starting an economy and reducing debt. You wrote last week that people here would be wise to pay attention to what's going on in Britain. Why is that?
KURTZLEBENWell, Britain was downgraded last week because of its debt and deficit woes, as well as its economic woes. Britain has slipped back into recession recently and that's a problem that's of course something we would want to avoid. We have already been downgraded once as well by one of the major rating agencies. Now all of this downgrade talk sounds like very high level financial nonsense perhaps to a lot of people. But what it means is that U.S. debt begins to look like a worse investment.
KURTZLEBENLong story short, a downgrade could hurt the economy. If it looks like our recovery is that bad and like our policymakers are not going to be making responsible policy, if Moody's or S & P says, all right we're going to downgrade your debt, that could derail the housing recovery for example. It could mean your mortgage rate goes up. It could mean the interest payments that businesses pay on their loans go up. It could really be really detrimental.
NNAMDIWell, some progressive economists like Paul Krugman have argued the debt needs to take a backseat to economic recovery. He says that even after the debt debacles of 2011, it's still very easy for the U.S. government to borrow money. What sense do you have for the level of concern among lawmakers about the credit rating? Obviously the sequester did not turn out to be so threatening to them in the end.
KURTZLEBENRight. And that was what was really interesting about that debt ceiling fight, as scary as it was, and it most certainly was, was that we got downgraded once by S & P. And our borrowing costs did not go up. In fact, they also went down, which surprised a lot of people I think. I think one of the biggest worries is that it happens again. Is that when you have two out of the big three rating agencies rating us lower instead of one of the big three then it looks more like a consensus is forming that, wait a minute, U.S. debt is a riskier investment. That's when the trouble could start.
KURTZLEBENThat's the big problem. No one knows. It just adds to all of that uncertainty, which has been the magic word in fiscal policy for a good two years now.
NNAMDIWhat do economists tell you about the effects of Britain's austerity program on its economic recovery?
KURTZLEBENRight. Well, austerity plus recovery equals problems. It seems to be that the -- that is the consensus from a lot of economists. You've seen it elsewhere in Europe. That's not to say that reducing deficits and debt is a bad thing because in many of these cases it's been necessary. In the U.S.'s case, once again, it is likely going to be necessary. The question is when do you enact it? When is the economy -- when is the recovery strong enough to enact austerity or even smaller budget cuts?
NNAMDIOn to the telephones. Here is Mark in Headsville, WV. Mark, you're on the air. Go ahead, please.
MARKHow you doing, sir? Thank you for taking the call. I do have a question in reference to what you mentioned about taking care of Social Security issues. But also my niece's husband is getting ready to go on furlough. He's going to lose $300 a month instantly, he was told. As far as, you know, what he does, he actually works on military airplanes and brings them back up to date. But he's going to take a big hit on that. And it is hurting him. He has a new child, brand new home. And it's definitely putting a major effect on him instantly. He's going to be in trouble, my niece and him and the child.
NNAMDIDon Kettl, we're not only talking about individuals like Mark's relative being in trouble. We're talking about how if he is in trouble, and there are thousands, maybe tens of thousands more like him, how that will affect the regional economy. What say you?
KETTLWell, that in many ways is the most interesting piece of all this. There are enormous implications for the people who are going to be furloughed. And it means real money out of their paychecks. But every dollar that disappears out of a paycheck is a dollar that can't be spent at a supermarket, can't be spent for a new pair of shoes, can't be spent going to movies. And then the people who otherwise might have been paid at the supermarket won't have money to be able to spend themselves.
KETTLIt ripples through the economy in lots of ways. And as Danielle was discussing earlier, one of the real uncertainties in all this is how's it all going to play itself out? The Federal Reserve has already warned that there are real potentials for consequences further down the line as we get toward the end of the year. No one wants to spin the economy back into recession, but it's possible that at the time it's just beginning to pick up steam again that this could be what really takes the wind out of its sails.
NNAMDIThank you very much for your call, Mark. And good luck to your relative. The number to call is 800-433-8850. Here is Norma in Lana, Maryland. Norma, you're on the air. Go ahead, please.
NORMAYes. My question is, they talk about entitlement, don't we pay into that? If we're paying into it, why is it called entitlement? You're paying for it. You know, I just get the feeling that these people really don't care about Americans. They haven't -- they can't even relate to us.
NNAMDIWell, there's the technical question you ask and Danielle can deal with that. Why are they called entitlements?
KURTZLEBENI think we may be getting into semantics here really.
NNAMDIIt's really a matter of semantics. You do pay into Social Security, of course, you do pay into those things. But they're called entitlements because in the language that politicians may choose to describe some of these things, these programs are programs that are not easily touched when they're trying to adjust the federal budget. And so they call them entitlements because it is a way of saying that they are not touchable.
NNAMDIAnd I guess what Congressman Wolf was saying is that we cannot look at programs like Social Security any longer as sacrosanct programs because even though they might be politically radioactive, that does not mean that we cannot look at them at all. And that's what he would like to have us do.
KURTZLEBENAbsolutely. And he mentioned Social Security a lot but we can't leave out Medicare and Medicaid. The cost of those are absolutely spiraling. And that's leads to a much bigger discussion of the health care system, which we can't even begin to touch in just this hour. But there's one thing that you talk about it being a sort of political third rail to touch entitlements, something that one of my coworkers wrote about last week -- his name is Rick Newman, he's one of our economic correspondents -- is that broadly speaking Americans want cuts to the debt, cuts to the deficit.
KURTZLEBENIf you ask them that nebulous question, do you want cuts, they say yes, absolutely.
KURTZLEBENBut when you start to ask them, okay what do you want cut, then everybody doesn't want their things cut. If you're getting a particular program, if you're benefitting from it you don't want it cut. That's where the problem is and it is going to be politically difficult, I would say, to do any of these cuts. And it's going to be a big problem for Congress in the coming months.
NNAMDIAnd regardless of how Congressman Wolf frames it, in the broader discussion, when you say cuts to Social Security and Medicare, the people who think that they're going to be immediately affected by those cuts are the people who are currently benefitting from those programs. And the senior lobby in the United States is not one to be taken lightly.
NNAMDIOn to Steve in Martinsburg, W.V. Steve, you're on the air. Go ahead, please.
STEVEYes. I probably work at the same place that the other fellow was talking about up in West Virginia with the aircraft. And I will be part of that cut also. It's not something that I'm looking forward to, but if it's what I have to do to help the system buy down the problems -- because like you say, nobody is willing to say where they're going to cut. The Republicans have put this thing before the Democrats saying, okay put your money where your mouth is. And they would not do that in my opinion.
STEVEAnd so it was this system that would -- had to happen. If you put people into office -- elect them into office to try to get your way and that doesn't work then it's a matter of at this point that we're just going to have to pay for it. And sooner or later something has to be done. You just can't keep putting it off.
NNAMDISomething's got to give, Don Kettl, is what Steve is sending. That even if we weren't facing this sequestration, even if Simpson-Bowles was put into effect that we'd be looking at cuts one way or the other. And that is a sacrifice that some people are going to have to make and Steve seems to be suggesting that he's willing to make it, Don Kettl.
KETTLYeah, and Steve is really a kind of model citizen because he recognizes that there's no way out of this without all of us taking some piece of the responsibility and bearing some piece of the cuts. But what we have to do is at some point, we hope, do this in a way that's a little bit more sensible. The one thing that everybody agreed was that this sequestration was so crazy, so nutty that nobody would ever do it except now that we have. And the other thing, that anybody's looked carefully at this knows, is that we sooner or later are going to have to deal, as Danielle pointed out, with Social Security and Medicare and Medicaid.
KETTLWe can't hold half the problem off the table and then expect to be able to balance the budget on the other half. The other important piece on this is that we, at some point, have to be alert to how this is going to affect different people in different parts of the society. And we simply cannot hold those who are beneficiaries of Social Security and Medicare and Medicaid in the future, not in the present but in the future, harmless and at the same time run the risk of causing enormous damage in the budget in the short term.
KETTLSo we need to be alert to the kind of economy that we're going to be building and the way that the cuts themselves and their costs are going to be distributed.
NNAMDISteve, thank you very much for your call. Don Kettl and I talked earlier about perception, but there's another kind of perception that can affect the economy. Here's an email we got from Leah in Virginia. "I'm a realtor in Alexandria and already I have buyers and sellers backing away from a move which effects the housing market and my income directly, even though I am not a government employee. The perception that there's going to be furloughs and layoffs, the perception that there's going to be less money available can cause people who may not be directly affected by this to hold back on their spending," which again, Don Kettl, would adversely affect the region's economy.
KETTLThat's exactly right and it's the -- not only the first order effects, that is people who are going to be getting furlough notices who may be won't be coming to work for one or two days or three or four days a month, but on top of that then what happens further on down the line. Because suppose, for example, you were on the verge of buying a house and all of a sudden you get a furlough notice saying that you're going to be not paid for one day...
NNAMDIOr you think you might get a furlough notice saying that.
KETTLOr you think that you might. You're going to be saying now's not the time to be buying that house, or maybe now's not the time to be upgrading the furnace or the air conditioning, or to buy the new lawnmower or to be doing any one of a number of other things, and that just plays itself down the road on the economy, and for as clearly serious as the furlough notices and the budget cuts are, it's the larger impact on the rest of the economy, that's what we especially need to be paying the most attention to.
NNAMDIGot to take a short break. When we get back we'll continue this conversation on the effects of the sequestration in this region. You can still call us at 800-433-8850. What concerns do you have most about the wave of federal spending cuts officially authorized by the president on Friday? What do you think is the best way forward for Congress and the White House at this point? 800-433-8850. Send us a Tweet @kojoshow, or email to email@example.com. I'm Kojo Nnamdi.
NNAMDIWelcome back. We're talking with Danielle Kurtzleben, a business and economics reporter U.S. News and World Report, and Donald Kettl, dean of the school of public policy at the University of Maryland. He's also nonresident senior fellow at the Brookings Institution. We're talking about the effects of sequestration and some of the political issues that are being raised and how those issues are likely to be addressed. Don, where is all of this going to leave the federal worker?
NNAMDIWe spoke last in January, just a short while after the deal was reached to avoid the so-called fiscal cliff. At that time you said it's also important to note that as far as foggy bottom and -- no. As far as foggy and uncertain the picture was for federal employees, it's just as bad or maybe even worse for many state and local employees. What do things look like now to you?
KETTLWell, the main thing that we know for sure is that we don't know anything much for sure. It is just so uncertain out there because all the federal agencies are now beginning to sort out where these cuts are going to go, what kind of implications there are going to be. For example, on federally subsidized school lunches and therefore the effect on local schools. What's going to happen on environmentalist and heating and cooling assistance, and what's going to be happening with federal transportation grants?
KETTLAcross the board we're still in the process of sorting all that, and so the implications for state and local governments are incredibly uncertain, and that's in addition, of course, to whatever impact has all going to have on their local tax receipts as a result of whatever local implications there are going to be as well. This is a slow motion, very slow moving kind of change that's going on right now, whose implications are going to be big but where the full shape is going to take some time to really become clear for everybody.
NNAMDIHere is Kevin in Annapolis, Md. Kevin, you're on the air. Go ahead, please.
KEVINHi Kojo. Great show. My question is why there's been no discussion about furloughing anything other than federal employees, particularly could be Congress, congressional staff, the people that actually are responsible for this, regardless of party affiliation.
NNAMDII don't know, man, ask Danielle. Danielle? Not going to happen.
MS. DANIELLE KURTZELBENI certainly doubt it. I should point out, first of all, actually as we were just mentioning over the break, this is something I heard a report about this morning, is the idea that in the house of representatives for example there are some budget cuts to be made. Whether that will lead to furloughs, I mean, we don't really know at this point. However, I should also point out that a lot of economists, forecasting firms, that sort of thing, are incorporating into their baselines and their projections that Congress will find some sort of a solution this in the coming months.
MS. DANIELLE KURTZELBENOne can only hope if you -- if you're opposed to sequestration that that will happen, but that as the slow motion train wreck sort of happens, that at some point Congress goes, all right, let's repeal this, let's repeal that, let's do this cut instead, that sort of thing. So it could still be averted.
NNAMDIKevin, thank you very much for you call. Along the line of what Congress has to do, here is Barbara in Falls Church, Va. Barbara, your turn.
BARBARAYes, Kojo. I'm very happy to be on the line. The Republicans last year, their main objective was to deceit or let Obama be a one-time president. Well, their action did not go through. Well, they should not be even paid for those last four years because that was their objective, and they lost.
NNAMDIWell, they've already been paid, so let's move on.
BARBARAWell, so now, my thought is they're supposedly going to be paid whatever their salaries are, and they're not going to be taking a reduction, but they're going to get an increase, my understanding is that's going to be happening. I don't -- I don't see the poor or the middle class people paying for this. That's just -- I just can't believe this.
NNAMDIWell, I will ask the question that I have inferred from your remarks, and that is that if you felt that they shouldn't have been paid for the first -- for the past four years, you seem to feel that they shouldn't be compensated if they can't come to an agreement in the future. So I'll ask Danielle what are the likelihood, and you've implied this already, what is the like -- everybody agrees that they're going to have to be compromise. Nobody seem to agree on exactly how they're going to compromise, but it would seem that there is likely to be some compromise at some point, isn't there?
KURTZELBENOne would hope. I hate to be so...
NNAMDICan we travel down this road of uncertainty indefinitely?
KURTZELBENWe've been doing it for so long, thus far, I would argue. I hate to be cynical, but since the debt ceiling debacle of 2011, and it was a debacle, I think that it's been amazing the degree to which we've been sort of fumbling from one fiscal crisis to another. So in other words, one would hope that coherent fiscal policy, regardless of what your party affiliation is, that both parties can come to some sort of a compromise. I mean, the question is what that looks like, whether -- what sort of balance there is between spending cuts and revenue increases which is, of course, the big sticking point right now.
NNAMDIBarbara, thank you for your call. Don Kettl, I don't know if you wanted to weigh in on that, because I was going to ask you more, but given that level of uncertainty, what real guidance do federal agencies have here about how to make their furloughs and the like when it comes to these sequester cuts? Do they have any freedom to do what they feel is best to keep running efficiently when they don't exactly know what's going to happen next?
KETTLWell, you know, actually Kojo, there are two questions there. The first is much discretion they have, and...
KETTL...the answer is a little but not a lot because the sequester is supposed to hit equally down to the activity and program level. And so in theory, each individual program is supposed to receive exactly the same cuts. Some agencies have more flexibility in doing that than others, so we're going to be hearing that some agencies are going to be furloughing employees one day a week, some one day a month. Some may not have to furlough at all depending on how much flexibility they have inside the individual programs.
KETTLBut the bigger question is, is this any way to run a government? You look at the people, for example, who run Medicare and Medicaid, and believe it or not, there are just 5,000 employees who are responsible for 20 percent of the entire federal government budget, and if you furlough them, then the very people who are in charge of trying to prevent fraud, waste, and abuse in Medicare, are going to be spending time at home instead of going out and tracking down the money. And that's the very definition of penny wise and pound foolish.
KETTLIt just makes no sense go forward. So in terms of the ongoing efficiency and effectiveness of the federal government, we're to be sure, taking a bite out of the deficit, but in the longer haul, this is exactly the wrong way to go at any kind of sensible long-term budget plan.
NNAMDIHere is James in Takoma Park, Md. James, you're on the air. Go ahead, please.
JAMESYes, sir. I was furloughed a number of times back in early/mid '70s from Bethlehem Steel, and in the aftermath, we would know on Friday, we'd get our pink slip for Monday, and so it was a different kind of thing, but the rumors and the stealing and the foreman abuse and just the transient nature of the whole thing, it just became, you know, a place waiting to die sort of. Now, I know the federal government is all backed up by -- it's not a private company, but there is -- I have a feeling you're going to have a lot of the same effects.
JAMESAnd I have a little question. I didn't that entitlements meant untouchable funds as he described. I think everybody in the world other than on the street thinks entitlements is a term to come up in the last ten years to mean we're going to mess with that program.
NNAMDIWell, I think what it means -- when it's applied to things like Medicare and Social Security, people are talking about the notion that since people have paid into these programs and have worked their entire lives, they are entitled to some benefits. But James, you raise another psychological issue that I'd like Don Kettl to address, and we heard Congressman Wolf earlier in the conversation talking about federal employees the kind of work they do, and we know how much federal employees get beaten up on every time there's a discussion like this taking place.
NNAMDIIf they are in fact going to be furloughed, Don Kettle, I guess what James is raising is the psychological effect it will have on those federal employees. They will feel even less needed, less desired, less loved if you will, then they were before.
KETTLWell, that's exactly the problem, and a couple points here. One is this whole notion of entitlement really means that people are entitled to it because of whatever it is that their situation may be, for example, being over the age of 65, and it's not discretionary. That is, the amount that they get is determined by a formula so that you don't have to have individual employees making those kinds of decisions. But then, what kind of frame of mind are those employees are going to be in, as James suggests.
KETTLI can tell you that it's not a situation, because I've the personal joy of being furloughed myself for two and a half years because of state budget problems in Maryland, and I'm working in an institution where we worked very hard to try to maintain employee morale all through that process, but it was very, very difficult. And the one thing that for the most part seemed to help was the sense that we were all in this together, and we were all working hard to try to achieve our mission, despite the fact we were under hard circumstances.
KETTLBut boy, after a while it really does begin to weigh on everyone, and you begin to see that percolating through the federal service as well, and we just can't have federal employees be the lightning rod where every time there's a storm the lightning bolts hit them. Can we do with fewer federal employees? Maybe. But we certainly need smarter federal employees in the right places to make sure that the amount of money that we spend actually is well spent, because the last thing we want is to open more of the federal government to waste, fraud, and abuse because there's nobody minding the store.
NNAMDIWell, Don, do you have any expectation that core government functions could degrade to the point where public opinion of federal services or supporting federal workers could change?
KETTLIt's possible. I think that, for example, in air traffic control, we're likely to see some fairly serious issues in some places, but it's going to be a little bit down the road, maybe a month, perhaps two. It could be the kind of situation where there's a bad storm in the Chicago area and it happens during the middle of furloughs and the airport's got to close down a runway, and so planes get backed up throughout the rest of the country, and that's a story on the evening news.
KETTLIt could happen with fewer federal food inspectors out there and some food processing operations have to be curtailed or shut down and that ends up having an effect on what we can buy in the stores. But it's going to be a kind of thing that percolates its way through in ways where if this were a crime scene investigation story on "CSI," there are going to be fingerprints all over the place, but it's going to be a little hard to figure out who the criminal was.
NNAMDIOnto Lee in Washington D.C. Lee, your turn.
LEEHi there. Thank you for listening, and I have a lot to say. I don't have much time to say it.
NNAMDIThis is true.
LEEFirst of all, we have a very serious problem because 30 or 40 years ago top level executives were only earning about 40 times what the low level workers were earning. This has escalated so that by the time we crashed in '08, they were earning anything from 400 to 1,000 as much as the low levels. This has affected Social Security, it has affected Medicare, and medical expenses, and I want to say something specific about Social Security. In 1983 when this fellow Lou was involved, it was agreed bipartisan that there should be a cap on Social Security at 90 percent, which means that everybody below 90 percent paid, and the top 10 percent above that did not.
LEEBut because the top level wages have escalated so fast, and the cap was only increased by, I think, cost of living, it has dropped down so that by the mid '90s it was only at the 85 percent level.
NNAMDILee what -- what are suggesting is an appropriate solution here, because I don't think...
LEEMove it immediately back up to the 90 percent level. We will have a lot more money coming in, and if that's not enough, raise it a half percent up to the 95 percent level per year, and let it stay there until the baby boomer generation dies out, and then it will probably be able to be lowered again.
NNAMDIOne of the suggestions, Danielle, for how we can deal with social security here. Have you heard that before at all on the Hill?
KURTZELBENI've heard plenty of suggestions of -- yes, of how to deal with social security. And, I mean, she does get into that idea of essentially, although she didn't say the word herself, of means testing, of this idea of whatever your current or your income level are wealth level is of that helping to determine what you're benefits look like. So that is one question as well. But like I said, in terms of entitlements, I really think that thing that plenty of people would say needs to be looked at is not -- is social security, but also Medicare and Medicaid once again.
KURTZELBENHealth care costs are really what are driving a lot of the upward spiraling in U.S. debt and deficit levels and spending levels.
NNAMDIThank you very much for your call, Lee. We got an email from Julia who says, "As a defense employee, I'm going to lose four days a month. That's more than a thousand dollars a month. If you think is -- if you do not think this is going to affect the economy, think again." Then we got on email from Susan who says, "I'm a title one teach and funding is always an issue. We're always waiting for funding, and education should not be hostage to the whims of members of Congress. We had a prekindergarten program that was very successful, but there is uncertainty whether money will be available. I cannot purchase supplies as I need them."
NNAMDIWe have less than one minute left, Don Kettl, but she says there is uncertainty. What are the chances that there will be, and when, certainty?
KETTLI think that we're going to have the certainty of more uncertainty for at least the next six months. I think that the sequestration is likely to be in place at least until Congress comes back around to deal with the debt issue. That might be in late May or June or July. I don't think anything much is going to happen in the meantime. Then it's anybody's guess whether or not they're really going to take the big steps that all along everybody knows they need to take.
NNAMDIDon Kettl -- Donald Kettl is dean of the School of Public Policy at the University of Maryland. He's also nonresident senior fellow at the Brookings Institution. Danielle Kurtzelben is a business and economics reporter U.S. News and World Report. Danielle, thank you for joining us.
NNAMDIDon, thank you for joining us, and thank you all for listening. I'm Kojo Nnamdi.
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