We have discussed the fiscal cliff in a previous post [Second Presidential Debate] this post explores what the effect of an impasse in Congress will be on the construction industry (when the economy tumbles over the fiscal cliff).[1]
The Fiscal Cliff:
During Summer 2011, Congress and President Obama debated the merits of increasing the debt ceiling for the federal government and how to trim the nation’s spiraling annual budget deficits. Although they eventually decided to increase the debt ceiling, Congress and the President essentially postponed major action on deficient reduction. Instead, the “Budget Control Act” of 2011 was passed, which recommended measures for reducing the federal deficient by at least $1.2 trillion between fiscal years (FY) 2012 and 2021. The committee’s recommendation was to be the subject of a congressional up or down vote. The members of the committee, however, were unable to agree on recommendations by the required deadline of December 2011, and so far this year, Congress has failed to resolve the question of how to reduce the deficit in accordance with the Budget Control Act mandate.
Unless Congress and the White House enact a plan by the end of the calendar year of 2012 to achieve the required deficit reduction target of $1.2 trillion, significant budget cuts will occur automatically. Known as “sequestration” in legislative terminology, the cuts will reduce federal spending by roughly $109 billion annually over the next 9 years, an amount that is to be split equally between defense and non-defense spending. Scheduled for January 2, 2013, the first round of such reductions looms large, threatening federal agencies with the imminent specter of automatic across-the-board cuts (denominated the “fiscal cliff”).
Effect On Construction/Infrastructure:
The Office of Management and Budget (OMB) estimates that defense discretionary funding and non-defense discretionary funding subject to cuts will be reduced by 9.4% and 8.2% respectively. As for mandatory funding, defense programs will be subject to a reduction of 10% while non-defense programs will be cut 7.6 %.
Among the federal programs involving infrastructure, most are classified by OMB as non-defense spending, meaning that they would be subject to slightly smaller reductions (7.6%) in terms of percentage than defense programs (10%). Environmental clean-up efforts conducted by the U.S. Department of Energy at defense sites would be treated as a defense program and, therefore, would be subject to a cut of $472 million or 9.4%.
Most federal programs, including most infrastructure programs, are funded by what is known as “appropriated budget authority,” meaning funding authorized by Congress and provided by the traditional appropriations process. By contrast, a smaller number of programs, including certain key highway and mass transit programs, are funded by what is known as “contract authority.” Programs funded by contract authority (with obligation limitations) are exempt from sequestration according to the American Association of State Highway and Transportation Officials (ASHTO). This distinction means that certain elements of discretionary funding for surface transportation would not be cut under sequestration. For example, federal aid for highways and mass transit financed through the Highway Trust Fund would be spared from sequestration because these are contract authority programs that receive annual obligation limitations. The Highway Trust Fund, however, will not go unscathed under sequestration and will be subject to a cut of 7.6%, resulting in a reduction of $471 million next year. Meanwhile, other surface transportation programs funded by appropriated budget authority, including funding for high speed rail, Amtrack and Federal Transportation Administration’s New Starts grants program, will be cut by 8.2%.
Aviation funding faces similar reductions. The agency’s operations budget will likely be reduced by $377 billion according to the OMB report, and further reductions are in line for the U.S. Environmental Protection Agency. For example, the Clean Water State Revolving Fund and Drinking Water State Revolving Fund will be cut by 8.2% ($293 million), the Super Fund program will lose $119 million, and the U.S. Army Corps of Engineers will see their programs cut by $326 million (construction and maintenance).
The effect sequestration will have on the Country’s infrastructure will be significant, long lasting and drastic on public works (initially) and industry-wide (eventually). OMB has called on Congress to prevent the planned cuts before they take effect: “the destructive across-the-board cuts required by the sequestration are not a substitute for a responsible deficit reduction plan.” The bi-partisan Policy Center, a think tank based in Washington D.C., in a September 14, 2012, news release stated, “We strongly hope that the OMB report reveals the ham-handed and indiscriminate sequester cuts for what they are: indefensible and irresponsible way to make budget changes. The message to policy makers is clear: urgent action is needed to replace the looming disfunction of sequestration with a balanced plan to address the deficit and the nation’s perilous fiscal trajectory.”
Comment: It seems unimaginable that our politicians would be unable to compromise on an issue of such importance to this nation. Professor Stipanowich has written an interesting article on the parallels of the challenges faced by Lincoln in passing the 13th Amendment through a sharply divided Congress to those faced by Obama in averting the Fiscal Cliff disaster. Leadership, resolve, and compromise are essential to the proper working of our political process. Professor Stipanowich’s observations are particularly poignant after viewing the Spielberg movie “Lincoln.”
[1] This post is based on an ASCE Civil Engineering November 2012 article entitled “Budget Cuts Loom for Infrastructure Programs Unless Congress Acts.“
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Fiscal cliff negotiations: Lessons from Lincoln
Thomas J. Stipanowich is William H. Webster Chair in Dispute Resolution, professor of law at Pepperdine University School of Law and academic director of the Straus Institute for Dispute Resolution. He is currently writing a book titled “The Lincoln Way: The Evolution of a Master of Conflict.”
Our president wishes to be seen as emulating our 16th chief executive, and now by happy accident Steven Spielberg’s opus “Lincoln” has opened amid a super-heated political struggle over the future of our national economy that may define success or failure for Barack Obama and Congress. Since the film focuses on Lincoln’s effort to end slavery by pushing the 13th Amendment through a sharply divided Congress, the urge to distill lessons from that experience is irresistible. If our political leaders examine Lincoln’s career and his approach to conflict, several guiding principles emerge:
1. Few things are truly non-negotiable. Studies in human behavior teach that public commitments like the “no-new-tax” pledge Republicans made to Grover Norquist or the promises by Democrats not to touch “entitlements” raise barriers to compromise. This “commitment bias,” reinforced by Fox News, MSNBC and other national media reinforcing the perceptions of their respective audiences, has undermined efforts to address our economic crisis. Lincoln grasped that effective solutions require flexibility and pragmatism – keeping options open and minimizing “non-negotiable” zones. Lincoln viewed two key priorities as non-negotiable: the preservation of the Union and preventing the expansion of slavery. Everything else was negotiable. Even the timing of and terms surrounding the abolition of slavery – an institution he detested – were ultimately dictated by events and political opportunity.
2. Collaborate to address the common enemy. Expert negotiators like Lincoln pay close attention to the values, needs and interests that lie underneath negotiating positions, as well as the consequences of not reaching a bargain. A moderate, Lincoln somehow managed to maintain a coalition that included “radical” abolitionists and border state conservatives in the face of civil rebellion; despite differences, they shared a common interest in preserving the Union and defeating the Confederate foe. Today, Republican and Democratic politicians alike are confronted with dire economic – and political – consequences if a mutually acceptable scheme cannot be hammered out before the Jan. 1 deadline. Both parties must work together to solve their common problem.
3. Focus on problem-solving, not on demonizing opponents. Today’s political debate is suffused with highly personalized rhetoric; reasoned argument is displaced by assaults on the motives and character of political opponents. As president, Lincoln was vilified not just in the South, but by many in the North who questioned his intelligence, integrity and loyalty. Yet Lincoln avoided nursing grudges or retaliating. He claimed, “I have not willingly planted a thorn in any man’s bosom.” Lincoln’s ability to rise above partisan invective and focus on real was a critical element in his ultimate political success.
4. Look for trade-offs. Political trade-offs are the indispensable lubricant of politics. From his early days in the Illinois legislature, Lincoln showed his mastery of political horse-trading, or “logrolling.” By identifying and responding to the needs of his colleagues and opponents, Lincoln could enlist their help attaining his own legislative priorities – like moving the Illinois state capital to his home town of Springfield. The pattern was refined and repeated throughout his career, culminating in the passage of the 13th Amendment. If the looming fiscal cliff is to be avoided, key trade-offs involving tax reform and reductions in government expenditures will be essential.
Since the film focuses on Lincoln’s effort to end slavery by pushing the 13th Amendment through a sharply divided Congress, the urge to distill lessons from that experience is irresistible.
5. Seek creative avenues to a solution. While Americans will feel relief through resolution of current fiscal issues, many will experience higher costs or reduced benefits. Meanwhile, there will be great beating of chests from both wings. In addition to profound political courage on the part of our leaders, some creativity of approach may be necessary. Lincoln knew the value of using third parties in avoiding impasse, and personally stepped in to mediate legal disputes involving his own clients when the situation called for it. Widely regarded and capable third parties who are not actively engaged in the current fight might be crucial to facilitating a deal to avoid the fiscal cliff. Obvious candidates are former Sen. Alan Simpson and Erskine Bowles, the co-chairs of the National Commission on Fiscal Responsibility and Reform. Another is America’s “Mediator General,” Kenneth Feinberg, who successfully administered the 9/11 Victims Fund allocation and compensation for victims of the BP Oil Spill.
The fiscal cliff looms large on the near horizon, but only because Lincoln’s lessons have not yet been embraced.
Thomas J. Stipanowich is William H. Webster Chair in Dispute Resolution, professor of law at Pepperdine University School of Law and academic director of the Straus Institute for Dispute Resolution. He is currently writing a book titled “The Lincoln Way: The Evolution of a Master of Conflict.”