Here are a few points on the sequester I haven’t seen elsewhere or I think deserve special emphasis.

Sequester replacement was mostly for show

As best I can tell there were no negotiations across the partisan aisle on how to replace the sequester. The President did some campaigning outside of Washington. Even if he had expected Congressional Republicans to fold to this pressure, his team was not doing the staff-level work needed to actually make legislation happen. And while leaders of both parties claim to hate the sequester, neither side hated it enough to be willing to even begin negotiations over how to pay for its replacement. The competing sequester replacement plans and the rhetoric on both sides look like they were mostly for public positioning and Member management within the Congressional caucuses rather than serious attempts to change the law.

Why the sequester will hold

There are two distinct legislative coalitions that in theory could unwind the sequester. In both hypothetical coalitions cuts in both defense and non-defense discretionary spending would be unwound.

One would be a center-left alliance formed by pro-defense spending Republicans agreeing to raise taxes and cut farm subsidies. These Republicans would be deciding that avoiding defense spending cuts is more important than preventing additional tax increases.

The other would be a center-right alliance formed by Democratic appropriators agreeing to drop their party’s tax increase demands and pay for higher discretionary spending offset entirely by entitlement spending cuts. These Democrats would be deciding that they care more about spending money than about extracting more from the rich.

These coalitions will never form as long as the sequester issue is being controlled by the President and the four Congressional leaders. Each of these five is working principally to hold his or her party intact, and each has so far succeeded. A coalition to replace the sequester would have a chance only if the issue were being handled below the leadership level, most likely in the House and Senate Appropriations Committees. In these committees everyone’s priority is to increase discretionary spending and both sides would be more likely to show flexibility on offsets. Since the issue remains squarely in the hands of the President and the party leaders I expect the sequester will hold indefinitely.

In addition, the optical damage of the cuts affects only the next seven months. If the continuing resolution extends post-sequester spending levels, then the implementation of next year’s sequester won’t show up as a “spending cut,” but instead as a slight increase (say, +2% for inflation) from this year’s spending levels. To the extent the political and press blowback from cutting spending arises from the optics of a decline in spending, that decline takes effect only this year. After that it’s built into the baseline, at least in a political sense.

Watch the CR for spending flexibility and maybe a little money

I instead expect the appropriators to instead pursue more modest versions of the same goals through quietly shaping the upcoming Continuing Resolution. The appropriators appear poised to give targeted flexibility to the Administration in a few limited areas where they agree that the sequester will impose too much pain, and they might even try to shift a few billion dollars around here and there. The Administration claims they are still opposed to funding flexibility. I think they’re irrelevant on this point and the Appropriators will now quietly exert process and legislative language control to minimize the policy harm from the sequester. And the more flexibility the appropriators provide, and the more they shift funds (within what I hope is a fixed post-sequester topline) to address sequester-driven policy harm, the more likely the sequester will be sustained over time.

The White House’s management challenge

While Team Obama now says the sky will now drop gradually rather than fall suddenly, they are sticking to their line that the pain from these spending cuts will be intolerable and will/should force Congress to increase taxes and discretionary spending.

With this argument they create a management challenge for themselves. They need the harm from these cuts to be severe and visible. The more harm is done and felt, the more likely that Republicans will relent to the president’s position (or so goes this logic). More policy harm creates more legislative pressure.

But the TSA manager at O’Hare or Logan or LaGuardia wants to minimize policy harm in his area, not maximize it. Sure he’d like more funding, but from his perspective there’s little he can do to influence Congress on something as big as the sequester. And since he will personally take the public heat for long security lines in his airport, his goal is to make do as best he can and minimize the harm done by the cuts.

The same is true for every program manager throughout the government. Each is judged on how well her program meets its goals given the funding available. If we simply assume that these managers will try to do their jobs as effectively as possible, both for noble policy reasons and for personal reputational reasons, then they will be working at odds with the President’s strategic goal of maximizing visible harm to undo the sequester. They will be trying to minimize the damage done while the President wants the opposite.

Playing a longer game?

It is possible the President’s primary goal is not to replace the sequester with offsets that he prefers. Sure he’d prefer that policy outcome, but it’s hard to believe that he and his team were so clueless that they actually thought his recent barnstorming would cause Republicans to fold and agree to raise taxes. Again.

Charles Krauthammer has suggested the President is instead playing a longer game, that his strategic goal is instead to win Democratic majorities in 2014 rather than to win a tactical victory by extracting a few tens of billions of dollars now from the House Republican majority. If Mr. Krauthammer is right, then the goal of barnstorming is to further damage the Republican brand rather than to enact legislation in the short run.

The other obvious benefit to the barnstorming is that without a deal to replace the sequester, the President now has a new target for blame-shifting in his macroeconomic message.

• Old message: All economic bad news is George W. Bush’s fault, all good news is because my policies are working.
• New message: All economic bad news is Congressional Republicans’ fault, while all good news is because my policies are working.

Both these “long game” explanations are dispiriting. That doesn’t mean they’re wrong.

My annotations follow each portion of the President’s remarks on the sequester today.

THE PRESIDENT:  Good afternoon, everybody.

I wanted to say a few words about the looming deadlines and decisions that we face on our budget and on our deficit — and these are decisions that will have real and lasting impacts on the strength and pace of our recovery.

Yesterday was the legal deadline for the President to submit his budget to Congress. Not only did he miss the deadline again this year, but his team has given no indication of when they will meet this legal requirement.

In these remarks the President proposes to delay immediate spending cuts and substitute a combination of (future, I think) spending cuts and tax increases. Even if you believe this will have a “real” effect on our recovery, it won’t have a “lasting impact” on it. A temporary loosening of fiscal policy would, at most, temporarily goose economic growth. That’s not “lasting.”

THE PRESIDENT: Economists and business leaders from across the spectrum have said that our economy is poised for progress in 2013.  And we’ve seen signs of this progress over the last several weeks. Home prices continue to climb.  Car sales are at a five-year high.  Manufacturing has been strong.  And we’ve created more than six million jobs in the last 35 months.

And GDP was flat last quarter … and the unemployment rate ticked up last month. 6M / 35 = +171K jobs/month, which when unemployment is high is nothing to brag about. “Our economy is poised for progress” is what you say when you can’t say “our economy is growing now.”

THE PRESIDENT: But we’ve also seen the effects that political dysfunction can have on our economic progress.  The drawn-out process for resolving the fiscal cliff hurt consumer confidence.  The threat of massive automatic cuts have already started to affect business decisions.  So we’ve been reminded that while it’s critical for us to cut wasteful spending, we can’t just cut our way to prosperity.  Deep, indiscriminate cuts to things like education and training, energy and national security will cost us jobs, and it will slow down our recovery.  It’s not the right thing to do for the economy; it’s not the right thing for folks who are out there still looking for work.

He argues that the past drawn-out process caused uncertainty which hurt consumer confidence. He recently made a similar argument against a short-term debt limit extension. But eight paragraphs from now he proposes to delay the sequester, further “drawing out” that process, to allow time to substitute different spending cuts and tax increases for the sequester. By his own logic, his proposal should further hurt consumer confidence.

I’m not sure how to respond to his point that immediate government spending cuts cause economic harm, because he has no proposal to tell us what he wants instead. If he proposes to change the mix of deficit reduction (more tax increases and defense spending cuts, fewer nondefense spending cuts) but not the timing, then all he’s doing is shifting resources from the private to the public sector, and from one part of government to another. That’s going to have no short-term growth effect and will hurt long-term growth because the private sector is smaller.

If instead he wants to substitute future deficit reduction for that which is about to begin March 1, then he is, in effect, arguing that given a weak economy, our budget deficit this year ($845 B or 5.3% of GDP) isn’t big enough. This is a traditional Keynesian fiscal stimulus argument. But his problem is that the numbers are too small: the sequester will cut spending this calendar year by about $65 B. Even if you push all that deficit effect into future years, you’re not going to move the needle much on a $16 T economy.

The deep indiscriminate cuts to which he refers are the result of the sequester that his advisors proposed to Congress in July of 2011 and which he signed into law that August.

And he argues that cutting government spending now would harm the economy and “folks who are out there still looking for work,” but his solution means that government employees would be protected from job loss while those previously employed in the private sector had to suffer the pain of a weak labor market. That doesn’t seem fair.

THE PRESIDENT: And the good news is this doesn’t have to happen.  For all the drama and disagreements that we’ve had over the past few years, Democrats and Republicans have still been able to come together and cut the deficit by more than $2.5 trillion through a mix of spending cuts and higher rates on taxes for the wealthy.  A balanced approach has achieved more than $2.5 trillion in deficit reduction.  That’s more than halfway towards the $4 trillion in deficit reduction that economists and elected officials from both parties believe is required to stabilize our debt.  So we’ve made progress.  And I still believe that we can finish the job with a balanced mix of spending cuts and more tax reform.

He’s got a small verb tense problem and a large logic problem here. Policymakers have cut the deficit by less than $100 billion so far, and they have enacted policies which, if not unraveled by future laws, would result in another $2.4ish trillion in deficit reduction over the next nine years. But all these future savings are from cutting discretionary spending, which is what the President is (ambiguously) proposing to undo here. It seems a bit hypocritical to simultaneously claim credit for enacted future cuts in discretionary spending at the same time you propose to undo them. The President would have more credibility here if he were proposing specific spending cuts and tax increases to substitute for the spending cuts he wants to undo. But the only thing he is specific about is that he wants to undo or delay the impending spending cuts.

THE PRESIDENT: The proposals that I put forward during the fiscal cliff negotiations in discussions with Speaker Boehner and others are still very much on the table.  I just want to repeat:  The deals that I put forward, the balanced approach of spending cuts and entitlement reform and tax reform that I put forward are still on the table.

But what exactly are those proposals, and will the President propose them in his budget? If he is willing to use a chain-weighted CPI for COLAs and tax bracket indexation, will he propose it? If he is willing to raise the eligibility age for Medicare, will he propose it? If not, how do we know what he is actually proposing? By reading Bob Woodward’s book and background quotes from unnamed senior advisors in POLITICO? He has never told us what this deal is that he put forward, nor has he proposed it to anyone other than Speaker Boehner. If you think it’s good policy, Mr. President, then put it in your budget.

Also, the deal in December has to be modified, right, since a new law enacted $600+ B of current and future tax increases? So technically the deal the President put forward then at a minimum has to be updated to reflect the new law, right?

THE PRESIDENT: I’ve offered sensible reforms to Medicare and other entitlements, and my health care proposals achieve the same amount of savings by the beginning of the next decade as the reforms that have been proposed by the bipartisan Bowles-Simpson fiscal commission.  These reforms would reduce our government’s bill — (laughter.)  What’s up, cameraman?  (Laughter.)  Come on, guys.  (Laughter.)  They’re breaking my flow all the time.  (Laughter.)

He mentions only one of the Big 4 entitlements. He and his party slowed Medicare spending growth in 2010, but then they turned around and spent those savings on a new health entitlement. Now he proposes again slowing Medicare spending growth, but ignores the other three sources of medium-term spending growth: Social Security, Medicaid, and the new health subsidies from the Affordable Care Act.

THE PRESIDENT: These reforms would reduce our government’s bills by reducing the cost of health care, not shifting all those costs on to middle-class seniors, or the working poor, or children with disabilities, but nevertheless, achieving the kinds of savings that we’re looking for.

Translation: He’ll cut medical provider payments rather than raise copayments, deductibles, or premiums.

THE PRESIDENT: But in order to achieve the full $4 trillion in deficit reductions that is the stated goal of economists and our elected leaders, these modest reforms in our social insurance programs have to go hand-in-hand with a process of tax reform, so that the wealthiest individuals and corporations can’t take advantage of loopholes and deductions that aren’t available to most Americans.

Translation: I’m not touching the big entitlements unless Republicans raise taxes (again, more) at the same time.

I disagree that his proposals “achieve the kinds of savings we’re looking for,” and that “the full $4 trillion in deficit reduction” is the right target, given that his stated goal is only to get the deficit down to 3% of GDP for the next decade. We need more savings now to start reducing debt/GDP, and we need long-term spending cuts for when entitlement spending growth is otherwise projected to explode. We need much more than $4 trillion of deficit reduction over the next decade, and it’s incorrect to suggest that there is a consensus among elected leaders on that point.

The “loopholes and deductions that aren’t available to most Americans” language is new to me. I wonder what he means? Tax deductions have greater dollar value to a high-income taxpayer than to “most Americans,” but both taxpayers have these preferences “available to them.”

THE PRESIDENT: Leaders in both parties have already identified the need to get rid of these loopholes and deductions. There’s no reason why we should keep them at a time when we’re trying to cut down on our deficit.  And if we are going to close these loopholes, then there’s no reason we should use the savings that we obtain and turn around and spend that on new tax breaks for the wealthiest or for corporations.  If we’re serious about paying down the deficit, the savings we achieve from tax reform should be used to pay down the deficit, and potentially to make our businesses more competitive.

Here’s the President’s position, as best I can infer:

1. Raising taxes to offset tax cuts: Bad;
2. Raising taxes to reduce the deficit: Good but he’s not proposing it;
3. Raising taxes to increase spending: He’s proposing it while pretending he’s doing #2.

He argues that raising taxes to reduce future deficits is a good thing, but as I understand it he wants to raise taxes to pay for more government spending (by undoing the spending sequester). That’s quite different.

THE PRESIDENT: Now, I think this balanced mix of spending cuts and tax reform is the best way to finish the job of deficit reduction.  The overwhelming majority of the American people — Democrats and Republicans, as well as independents — have the same view.  And both the House and the Senate are working towards budget proposals that I hope reflect this balanced approach.  Having said that, I know that a full budget may not be finished before March 1st, and, unfortunately, that’s the date when a series of harmful automatic cuts to job-creating investments and defense spending — also known as the sequester — are scheduled to take effect.

I don’t blame the American people for agreeing with the President; he is personally popular and it is impossible for them to understand what he is proposing. He has never publicly described or proposed the deals he privately offered to Speaker Boehner. He hasn’t proposed a budget this year and doesn’t appear likely to do so soon. He calls government spending “investment,” tax increases “tax reforms,” and welfare payments “tax cuts.” He keeps shifting baselines against which he measures “balance” and he repeatedly conflates taxes and spending. I have been studying and working on fiscal policy for more than 15 years and I can barely understand what he’s saying. No wonder the American people are confused and frustrated.

He says, “I know that a full budget may not be finished before March 1st”:

• He missed the statutory deadline for proposing a budget and is creating further delays and uncertainty by not even announcing when he will propose a budget, complicating the jobs of both the House and Senate budget chairmen.
• The (often missed) deadline for a budget resolution conference report is April 15th.
• So it’s unfair to suggest that Congress is somehow failing by not finishing a full budget by the March 1 sequester deadline.

THE PRESIDENT: So if Congress can’t act immediately on a bigger package, if they can’t get a bigger package done by the time the sequester is scheduled to go into effect, then I believe that they should at least pass a smaller package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester for a few more months until Congress finds a way to replace these cuts with a smarter solution.

Who in Congress is seriously discussing now “acting immediately on a bigger package?” Anyone? The Grand Bargain died on New Year’s Day with the enactment of a $600+ B tax increase. This is another straw man so that the President can repeatedly say “I’m for a big deal” while making no new concessions to get one done nor taking any steps to create an environment in which such a deal might happen. The “if” clause above is therefore trivially true. The President is saying Congress should replace or delay the sequester for a  few months but he offers no specific proposal to do so.

THE PRESIDENT: There is no reason that the jobs of thousands of Americans who work in national security or education or clean energy, not to mention the growth of the entire economy should be put in jeopardy just because folks in Washington couldn’t come together to eliminate a few special interest tax loopholes or government programs that we agree need some reform.

Yes, there is:  Because if you enact a law now that raises taxes now and promises to cut future spending, what is to say that those future spending cuts won’t again be delayed, just as the President is proposing to do now? Also, shifting resources from the private sector to the public sector (aka “tax-and-spend”) doesn’t increase economic growth, it stifles it.

And he’s exaggerates when he suggests that “the growth of the entire economy” is contingent on whether government spending is cut by four-tenths of a percent of GDP this year.

THE PRESIDENT: Congress is already working towards a budget that would permanently replace the sequester.  At the very least, we should give them the chance to come up with this budget instead of making indiscriminate cuts now that will cost us jobs and significantly slow down our recovery.

Are they? Maybe the Senate is. I’m not sure the House is looking to replace the sequester in their budget. Time will tell.

THE PRESIDENT: So let me just repeat:  Our economy right now is headed in the right direction and it will stay that way as long as there aren’t any more self-inflicted wounds coming out of Washington.  So let’s keep on chipping away at this problem together, as Democrats and Republicans, to give our workers and our businesses the support that they need to thrive in the weeks and months ahead.

Wouldn’t it be nice if he had said “let’s keep chipping away at this problem together, as Americans, …” rather than “as Democrats and Republicans”?

THE PRESIDENT: Thanks very much.  And I know that you’re going to have a whole bunch of other questions.  And that’s why I hired this guy, Jay Carney — (laughter) — to take those questions.

Thank you, everybody.

I have a question: Where is the President’s specific proposal? At 7:43 AM EST today POLITICO reported:

POLITICO: President Barack Obama will propose a package of short-term spending cuts and tax reforms in an effort to head off the looming sequester cuts Tuesday at 1:15 p.m., a White House official tells POLITICO.

What happened to the “package of short-term spending cuts and tax reforms?” It seems to have died between 7:43 AM and 1:15 PM when the President spoke.

(photo credit: White House photo by Pete Souza)

I’d like to thank White House Press Secretary Jay Carney for giving me so much material to work with in his press briefing today.

MR. CARNEY: Well, there’s a lot in your question, so let me go first to the broader fact, which is that we have seen consistent job growth over almost three years.

Nope. Job growth began in March 2010 and was strong for March, April, and May. We then lost net jobs for four months. We have had continuous job growth since October 2010. That is two and a quarter years, which is not “almost three.” (Source: BLS)

If you start measuring in March 2010, job growth has averaged +141K/month. If you start measuring in October 2010, job growth has averaged +153K/month. If we were at full employment those numbers would be fine because you need around +125-150K/month to keep up with population growth. Given continued high unemployment those numbers fall far short of the job growth rate we need to return rapidly to full employment. We’re generally doing a bit better than treading water, but not much.

MR. CARNEY: But there’s more work to do and our economy is facing a major headwind, which goes to your point, and that’s Republicans in Congress.

This is an aggressive and, I think, novel presentation—labeling Congressional Republicans as an economic headwind. Those same Republicans should respond aggressively to this particular language.

MR. CARNEY: Talk about letting the sequester kick in as though that were an acceptable thing belies where Republicans were on this issue not that long ago, and it makes clear again that this is sort of political brinksmanship of the kind that results in one primary victim, and that’s American taxpayers, the American middle class.

You’re correct that the GDP number we saw today was driven in part by — in large part by a sharp decrease in defense spending, the sharpest drop since I think 1972.  And at least some of that has to do with the uncertainty created by the prospect of sequester.

To the end of your question, I would say that the President has had and continues to have very detailed proposals, including spending cuts, that would completely do away with the sequester if enacted, that approaches deficit reduction — not just the $1.2 trillion called for by the sequester, but even beyond that  — in a balanced way.

His logic is:

• The sharp decline in Q4 defense spending was in large part responsible for today’s bad (-0.1%) Q4 GDP growth number;
• The President wants to replace the sequester cuts with a “balanced” package of tax increases and other spending cuts;
• Republicans oppose the President’s reasonable “balanced” alternative;
• A recent shift suggests that Congressional Republicans appear to favor leaving the upcoming sequester in place;
• Therefore the bad Q4 GDP number is because Congressional Republicans refused the President’s reasonable alternative and may be willing now to leave the upcoming sequester in effect.

Problem #1 with this logic is that the President’s proposal would be deficit neutral, so any increase in discretionary spending that helped short-term economic growth would be mostly offset by cuts in other government spending and increases in taxes. If you buy the logic of yanking hard on the Keynesian short-term fiscal lever (big if) then your proposal needs to increase the deficit to get any first order GDP kick. So the tax-increasing solution Republicans are rejecting wouldn’t help GDP growth, it would just shift the components around so that government spending grew faster and private consumption and investment grew more slowly.

Problem #2 is that his sequence doesn’t work. Mr. Carney implies that last quarter’s GDP was harmed by Congressional Republicans’ movement in the past two weeks toward allowing the sequester to take effect. That puts the effect before the cause, which is hard to do.

MR. CARNEY: So it can’t be we’ll let sequester kick in because we insist that tax loopholes remain where they are for corporate jet owners, or subsidies provided to the oil and gas companies that have done so exceedingly well in recent years have to remain in place.  That’s just — that’s not I think a position that will earn a lot of support with the American people.

The words “DEMAGOGUE ALERT” should flash any time you hear the ol’ corporate jet tax break. Eliminating it would raise a few billion dollars of revenue compared to spending problems measured in trillions.

Still, Republicans should find a way to propose repealing this tax break and using the revenue to lower some other tax in a way that both parties like. Neutralize the stupid talking point by getting rid of this tax preference, but don’t use the revenue raised to increase government spending. Don’t wait for tax reform, get rid of this one quickly in the right way.

MR. CARNEY: Speaker of the House Boehner put forward, in theory, at least, a proposal late last year that said he could find $800 billion in revenues through tax reform alone — closing of loopholes and capping of deductions.  So surely what was a good idea then can’t suddenly be a bad idea now.

Did he forget about the $617 B of tax increases that were just enacted? No. This is another important rhetorical trick – suggesting that the previously offered +$800B and the recently enacted +$617B are additive rather than duplicative. I’m certain that’s not how Congressional Republicans think of it. Watch for this rhetorical trick to be repeated often.

MR. CARNEY: The President put forward a proposal to the super committee that reflected the balance that was inherent in every serious bipartisan proposal, including the Simpson-Bowles proposal.  A refusal at the time to allow revenue to be a part of that meant that the super committee did not produce.

Congressional Republicans told me at the time that the Administration was nowhere to be found during the Super Committee’s failed attempts in the fall of 2011.  “Completely disengaged – absent,” was how one insider described the Administration.

Republicans on the Super Committee offered to their Democratic colleagues to accept higher revenue in exchange for either significant entitlement reforms or pro-growth tax reform. Mr. Carney’s claim that Republicans “refus

Based on some further development and feedback I’m going to update last week’s post on how Senate Democratic plans for the budget resolution interact with the prospects for enacting significant tax reform. My core projection is still quite pessimistic, but I think I have a better feel for the legislative dynamics.

Update: During debate on H.R. 8, the New Year’s tax increase law, House Chairman Camp made clear that he will move through the House a bill that is revenue-neutral (after H.R. 8 took effect). This makes a “preconferenced” Baucus-Camp-Hatch bill highly unlikely, and means that any agreement would come only in a conference after the House had passed a revenue-neutral bill. Such a conference report might or might not be revenue-neutral, but at least the first stage of the process would not increase revenues.

Sen. Schumer’s Senate reconciliation for “tax reform” won’t happen.

A couple of friends pointed out that a Senate reconciliation bill can only be produced by the House and Senate passing identical versions of a budget resolution in the form of a conference report. This means that Senator Schumer’s push last week for a 51-vote procedural path to enacting a tax bill can happen only if the Senate Democratic majority reaches an agreement on deficits, debt, and aggregate spending and tax levels with a Republican majority House. This leads me to four obvious conclusions that I missed in last week’s post:

1. Senate Democrats can’t force the Senate to pass a partisan tax bill through reconciliation without House Republican acquiescence on creating the process to do so.
2. Even in the unlikely scenario where House Republicans and Senate Democrats agreed to create such a reconciliation “vehicle” for tax reform, they couldn’t do so unless they also agreed on the other components of a budget resolution: deficit and debt levels, spending and tax aggregates, and the aggregate size of changes to major entitlement programs and discretionary spending.
3. Therefore, Senator Schumer’s prediction early last week of a 51-vote reconciliation path for Senate passage of “tax reform” has almost no chance of happening.
4. And if tax reform is even to pass the Senate it will need bipartisan support. For Chairman Baucus this means he needs Finance Committee Ranking Member Hatch early in the process, and House Ways & Means Committee Chairman Camp after/if the Senate passes a bill.

In support of this, I’d note that in a press conference last Wednesday Senator Schumer did not push the reconciliation idea, instead describing it as something that Chairmen Murray and Baucus would work out. I’ll bet that idea is now dead.

Baucus v. Schumer

I think Sen. Schumer