The political grid lock that is Washington right now is moving towards a defining moment. The sequestration of about $500 billion dollars from the defense budget over the next 10 years is due to take effect on January 1, 2013 unless the Congress does something. There are several political compromises that have been suggested and even more political impacts to consider.
During a recent closed-door meeting with several dozen defense CEOs and other executives, Secretary of Defense Panetta is reported to have detailed four possible scenarios:
• Congress does not take any action with sequestration resulting.
• During the upcoming lame-duck session of Congress (after the November elections), a plan is developed and approved that stops sequestration.
• Members of Congress agree to some form of a $1.2 trillion set of cuts to avert sequestration before the election.
• Congress inserts language into a continuing resolution (required because the Senate has not agreed to a budget for over 3 years) that delays sequestration for some period, but the government implements the first and perhaps second year of cuts. Some inside the beltway refer to this as the “mini-sequester.”
Panetta is reported to have said that he would rather see a more comprehensive, long-term deficit-reduction deal. However, he opined that the most politically practical solution may be a short-term agreement of one or two years.
There is a strategy debate about the Asian strategy and sequestration just begining, which we will address in a subsequent posting.
Many analysts believe that there is no possibility of a deal before the election. They are most likely wrong! The defense industry is increasing the pressure on Congress and the administration:
• Many of the large defense contractors have been encouraging their employees to contact Congress and tell them that sequestration is a bad idea.
• Many defense CEOs are warning that before the election that they will be required by law to issue “pink slips” to employees.
The discussion then turns to the vulnerability of the Obama administration on the jobs front. The question that is asked is can the administration “spin” the “pink slips”? Will defense CEOs target the ‘pink slips” into some battleground states?
On another front is the question of other debt reduction measures such as tax increases. Most pundits do not see any tax adjustments until after the election when there will be tremendous pressure on the Congress to avoid the greatest tax increase in our history that is scheduled to go into effect on 1 January also.
If there is no deal on sequestration before the election the “lame duck” session will be one the most critical Congressional sessions in some time.