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September 23, 2014

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How would business handle the sequester?

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By now, we’ve all seen and heard the parade of public officials predicting doom and gloom if the $85 billion budget sequester kicks in Friday. Both sides of the aisle apparently want us to forget that this is a problem of Washington’s own making.

The histrionics are entirely unnecessary. There isn’t a CEO in this country who would allow him- or herself to get trapped in such a predicament — or would wait until the last minute to find a way out.

On the first point, that the crisis is self-made, I refer you to the Budget Control Act of 2011. Signed into law in August of that year, the act provided that automatic spending cuts would take effect Jan. 2, 2013, if Congress’ Joint Select Committee on Deficit Reduction was unable to craft an acceptable bipartisan plan to cut long-term deficit spending by at least $1.5 trillion over 10 years.

Just before Thanksgiving 2011, that committee threw in the towel, stating: “After months of hard work and intense deliberations, we have come to the conclusion ... that it will not be possible to make any bipartisan agreement available to the public before the committee’s (Nov. 23) deadline.”

So Congress and the White House had 15 months to get their act together.

But they couldn’t. So late last year, with Washington in a state of high frenzy about going over the “fiscal cliff,” they punted, passing legislation that increased taxes on high-income individuals but delaying the automatic spending cuts — the so-called sequester — until March 1.

Now a new round of histrionics: the “Washington Monument ploy.” The short version is this: If the budget cuts — really, reductions in planned increases — are allowed, drastic measures will be necessary, such as closing the Washington Monument to tourists. And worse, they’ll also be forced, the storyline goes, to cut back on food safety inspections, school lunches, security screening at airports, processing income tax returns and other high-profile activities.

One of the problems with Washington is that, with federal spending nearing $4 trillion, nobody seems to know how much money is being spent on exactly what.

President Jimmy Carter tried to get a handle on this in the late 1970s with an approach known as zero-based budgeting, which he had adopted, as governor of Georgia, from Peter Phyrr, then a controller with Texas Instruments.

Another attempt was made during the first year of the Clinton administration, with the adoption of the Government Performance and Results Act (amended in 2010 with the Government Performance and Results Modernization Act). But neither of these efforts proved fruitful, serving as bureaucratic window dressing rather than providing serious budget analysis.

A corporate executive would do things differently.

First, he or she would know how the company’s money is being spent and how much everything costs. If belt tightening is needed, good executives would do everything they can to prevent across-the-board cuts, as the Budget Control Act requires.

Many executives have faced tougher decisions than Washington faces today. The federal budget proposed by President Barack Obama for fiscal 2013 calls for $3.8 trillion in total spending. An $85 billion reduction — the amount spending would fall under the sequester — would trim overall spending by less than 3 percent.

If a CEO had to pare back 2 to 3 percent, he or she would look at the performance of the company’s operating units, determine which units are underperforming (and why), and close, sell, or spin off the ones that aren’t meeting their goals. At the same time, he or she would provide additional resources to the most productive units and those with the most potential. Using this approach, the CEO probably would find 5 percent to cut without breaking a sweat.

Similarly, lots of government activities could be cut. A February 2012 Government Accountability Office report found that Washington wastes tens of billions of dollars annually on overlapping government programs. An example: 53 programs run by four agencies that provide economic development assistance.

A good CEO wouldn’t make indiscriminate cuts across the board; a CEO would eliminate waste, duplication and programs that aren’t meeting their objectives.

Why can’t Washington do this?

Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group and an author.

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  1. Author is totally correct. Washington DC is a fantasy land with fictitious budgets and numbers. All based on politics not business. Only in Washington DC and from it's leaders do we hear dire warnings that a 2.5 percent reduction in growth from one year to another has catastrophic effects. Not in the real world of budgets and business.

    CarmineD

  2. The sequester is essentially a poison pill. It was a bipartisan agreement to set up a situation so onerous that neither Republicans or Democrats in their right mind would allow it to actually take place. Just to prove how ridiculous we can really be, we're going to actually swallow the pill.

  3. It is actually $85 billion in cuts over the course of several years. If it happens, this year would be about $45 billion in cuts with the rest coming at some undefined point in the future.

    It isn't a big deal.

  4. The private sector would consider how to cut in areas that minimize the impact on customers. The public sector is the opposite. It threatens cuts in areas that the public cares the most about in hopes of keeping funding as high as possible.