Congress narrowly averted an unprecedented U.S. default in August—agreeing to cut $900 billion from the federal budget immediately and $1.2 trillion more by Thanksgiving. That did not stop Standard & Poor’s (MHP) from downgrading U.S. debt. But it did instill just enough confidence to calm Washington and mollify the markets, at least for a time.
The reason for that confidence was that further cuts would either be identified by the bipartisan supercommittee or, if that failed, through a “sequester”—non-negotiable cuts over a decade, evenly divided between domestic and military spending. This is an outcome neither Democrats nor Republicans want. And that’s the whole point: The idea was to make failure unpleasant enough to compel agreement.
The supercommittee’s Nov. 23 deadline has yet to arrive. But with the prospect of success fast receding, a group of Republicans is already plotting to ensure that $500 billion in non-negotiable, automatic cuts to defense are both open to negotiation and anything but automatic.
How is it that a law drafted to be bulletproof turns out not to be? The trick is in the timing. The automatic cuts don’t take effect until January 2013, giving Republicans more than a year to find ways to undo them. House Armed Services Committee Chairman Buck McKeon (R-Calif.) has taken the lead in trying to maintain the military budget by holding hearings and meeting with lobbyists for the major defense companies, many of whom were anticipating a diminished Pentagon. “You could see this trainwreck coming,” says Barry Rhoads, president of Cassidy & Associates, the Washington lobbying firm. The GOP’s message: Following through on what Congress already agreed to is simply too dangerous. “These cuts would be so draconian in measure that it would impair our national security,” Senator John McCain (R-Ariz.) told Bloomberg Television on Nov. 8.
“It’s clearly an orchestrated effort,” says Representative Barney Frank (D-Mass.), an outspoken critic of the Pentagon’s $700 billion budget, which has doubled over the last decade. “They’ve ramped up and sent out the call to the contractors because they can’t win on the merits of national security.”
Heading off the defense cuts won’t be easy. Were Republicans to succeed—no sure thing, since Democrats control the Senate and White House—they would immediately encounter the problem of the deficit. The presumption that an additional $1.2 trillion in savings was guaranteed persuaded the other two major ratings agencies to hold off on downgrading U.S. debt. If that number were suddenly halved, they would surely act. That could be calamitous, and would infuriate fiscal conservatives.
For that reason, lawmakers are looking for other cuts to take the place of those that now threaten the Pentagon. Three strategies are now circulating on Capitol Hill. The first, a bill being drafted by McCain and Republican Senator Lindsey Graham of South Carolina, would replace military cuts with a 10 percent reduction in pay for members of Congress and a 5 percent reduction elsewhere in the budget—though they haven’t spelled out where.
Defense industry champions are also eyeing potential savings from the drawdown of U.S. troops in Iraq and Afghanistan. Projected spending in the budget exceeds what’s likely to be required, especially with U.S. troops set to leave Iraq by the end of the year. Congress could pass an updated budget reflecting this state of affairs, thus claiming enough savings to cover the defense cuts. When Democrats proposed doing this last summer as part of a larger deficit-reduction package, many Republicans denounced these anticipated war savings as phony because they would not actually alter government spending. Changing tack now would be awkward—although awkwardness is rarely an impediment in Washington.
A third option would target federal pensions. The idea of cutting benefits for government workers arose during the summer in negotiations over a “grand bargain” that never materialized; in exchange, Democrats had sought tax increases that Republicans wouldn’t allow. But there’s an ingenious political logic to Republicans’ proposing federal pension reform as an offset to the defense cuts: Trimming government benefits would delight the Republican base while presenting many Democrats with the uncomfortable choice between “Big Government” and national security, possibly yielding enough votes for the bill to pass Congress. The principal flaw is that it would probably go no further.
President Barack Obama might relish vetoing a spending bill in the name of deficit reduction, which is why many defense hawks worry that these cuts are ultimately unavoidable. Some, who genuinely fear sequestration will endanger national security, are considering doing something heretical in today’s GOP: raising taxes. “I have never voted for a tax increase,” McKeon declared at the American Enterprise Institute in September. But were that the only way to avoid defense cuts, he added, “I would go to strengthen defense.”
In fact, this could happen without any vote to raise taxes. That’s because the Bush-era tax cuts expire on December 31, 2012—the day before sequestration would take effect. And as Frank points out, if enough Republicans were willing to go along, Congress could extend those tax cuts for all but the highest incomes, capturing just enough revenue to preserve the government’s credit rating.
Here, Republicans would be the ones facing an uncomfortable choice: Raise taxes or cut defense? McKeon has made his views known. The size and future profile of the Pentagon could depend on who is willing to go along with him.