Sequestration refers to the automatic spending cuts that the government of the United States passed into law in 2011, and which went into effect March 1st of this year.  The original idea was that the impending meat cleaver approach to the budget would force a contentious Congress to reach agreement on smarter and more targeted cuts for the good of the country. Common sense might tell you that making intelligent budget cuts would be better than reductions across the board. Most people held that view.

But my common sense argues the opposite. I say dumb cuts are every bit as good as intelligent cuts, at least for cuts of the size we are discussing. I'll explain.

For starters, consider how often common sense is wrong. My most-used example is that common sense tells you that investing in individual superstar stocks would give you a better return than buying the market average. But we know from studies that buying individual stocks is a sucker's game unless you have insider or special knowledge. Common sense often steers you toward calamity.

The thing we call common sense is in reality some mixture of bias, fear, self-interest, ignorance, misjudgment, emotion, and about a dozen other psychological malfunctions. Common sense only operates well in simple situations, and the budget of the United States is far from simple.

When the sequestration was originally contemplated, the hope was that by 2012 Congress could get past partisan politics and agree on intelligent, common sense cuts. The flaw in that plan is that intelligence and common sense aren't real things when it comes to the budget. If you fired everyone in Congress today and replaced them with new folks, you would end up right back where we are. In the context of massive complexity, common sense and intelligence are nothing more than the soothing sensations our brains provide so we'll feel less frustrated and confused. Our tiny brains prefer simple statements such as:

Cut that defense budget!

Stop giving those freeloaders my money!

Yay for solar power!

I have a bit of insight about across-the-board budget cuts because I was a budget manager for a bank and then a phone company during a portion of my corporate career. My job was to present management with enough information for them to make "intelligent" budget decisions. Management would look at my information, assume it was nothing but a compilation of lies from department heads, and proclaim a 10% budget cut across all departments.

And oh how the department heads squawked about the irrational budget process. But they made the cuts, after much complaining, and life went on. As the budget guy, I got to see how many doom and gloom stories transpired because of the "dumb" cuts. Answer: none. I never saw a real business problem that could be traced back to the budget cuts. People simply adapted to the new constraints.

I would go so far as to say that sometimes the best way to improve a department function is to cut its budget. Constraints generate creativity. People will only try hard to improve if it is necessary. A fully-funded budget removes that creative energy.

Consider this highly simplified example. Let's say a government-funded medical procedure costs $1,000 per patient, but the budget cuts make it impossible to spend that much for the coming year. Once the constraints are in place, you might see more effort in searching for cheaper solutions across the globe. Before the cuts, there was no reason to even look for a cheaper solution. Now folks might do research and discover that India has a procedure that costs $100 and produces the same result. Or you might do a study that results in a better understanding of which patients will respond to the treatment, so you can skip the people who wouldn't have been helped. For the best results in the long term, you need a healthy balance of both funding and constraints.

The best way to ruin a good program is to overfund it until everyone involved gets fat and lazy. One could argue that the best way to improve a program - once it has reached a massive national scale - is to cut its budget and force some creative energy into the system.

So while most of the country was worrying that the dumb budget cuts of the sequestration would lead to doom, I was thinking it was a brilliant work-around to a failed Congress. The dumb budget cuts would be no worse than intelligent cuts, and we'd gain some degree of predictability about the fiscal future. The economy loves predictability.

This is another situation in which the Adams Law of Slow-Moving Disasters comes into play. The law states that any looming disaster that the general public recognizes years in advance will be solved. For example, if today the government proclaimed that Social Security would go away in the year 2040, the country would adapt. And the solution would likely have many advantages over Social Security in the long run. For example, perhaps it would trigger a massive wave of home upgrades as people add in-law apartments to their existing homes. The economy would boom, grandma would be close to the grandkids, and you could easily feed her with the money you saved by not paying Social Security every month. When she dies, you have an extra space to rent.

Don't get too caught up in my examples. I'm just making the case that budget constraints fuel creativity. And that trade-off is sufficiently unpredictable that common sense simply can't tell you whether to cut a particular large program or not.

So how do you make budget decisions in the face of massive unpredictability? That's simple: You pick the path that is cheapest. And that is roughly what the sequestration did.




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May 14, 2013
...Ummm..Scott, werent you the guy who, back in December, was going on about how bad the fiscal cliff was going to be? And how we should form an anti-incumbent party to throw out the politicians for letting it happen?


Granted the sequester is different in scale but the principle is the same.
-3 Rank Up Rank Down
May 14, 2013
Politics = Zzzzzzzz....

Bad Idea T-Shirt Girl? An Idea I can get behind.
May 14, 2013
Perhaps the best example of over-funding killing creativity is in our education system, where we have taken it as gospel that more money = more caring and better education for kids.

If we cut funding for education by 5%, nothing much would likely happen. But, if we cut it by 50% or more, guess what? We would get radical changes - i.e. the changes we need.

It is absolutely incredible that in a wired world, where every math student in America could feasibly be taught math by Steven Hawking, we are instead having them taught math by roughly 1 million different teachers, with wide varying degrees of expertise, none approaching Steven Hawking. And then, instead of having computers automatically grade the students' work and feed them additional questions based on their observed level of mastery, we have 1 million teachers grading papers manually and giving out the same set of practice exercises to every kid in the class.

It is absolute lunacy, which would go away in an instant if we slashed the budget by 50% or more. Instead, we get bleeding heart politicians telling us that just one more 5% budget increase will make everything better and finally teach Johnny how to read (or multiply).
May 14, 2013
"A fully-funded budget removes that creative energy."

Indeed, the worst part of the sequestration was the system of constraints put on departments that inhibit any creative flexibility to move funds around intra-departmentally. This was exposed in resolving the air traffic controller fiasco with no increase in funds, but by waiving the internal constraints. I suspect that something similar is at work with the Meals on Wheels cuts, etc.
+2 Rank Up Rank Down
May 14, 2013
I'm... how to put this... a tad skeptical.

There are other ways to improve efficiency, and encourage efforts to do so, than artificially forcing necessity - an approach which can backfire horribly if improvements turn out to not actually be possible, or if they have rather unfortunate consequences.

E.g., consider a (simplified) example of a theoretical restaurant. They're doing alright in terms of custom, but struggling to make profit. So let's say to improve that situation they decide to cut the budgets - say for staff and raw cooking materials - 10%.

Depending on how they operate, it might work in the short term. They might be able to source cheaper raw cooking materials without lowering quality, depending on what they're already doing. It might be possible to put staff on to more flexible contracts delivering savings - although that may not be so great for the individual staff, and may or may not result in losing more experience staff. But maybe it works, maybe it doesn't, but let's say it does, so they repeat the exercise. There's clearly limits to what can actually be done here. Beyond those initial possible savings, the quality of the food is going to go down, and so is the quality of the staff and/or service. It seems likely that would have an impact on the restaurant's business, forcing further cuts without choice this time. The restaurant enters a death spiral, and closes.

That worked out well didn't it.

I'm not saying that would be the only possible outcome - it's a simplified scenario and clearly there are other factors. But the point is that whether cuts can work or not depends on the context, that is where you are to start off with, and what is actually possible from there. That's not to say 'common sense' is the solution. But 'common sense' and 'just cutting everything' are not the only two options. I'd perhaps suggest making decisions based on rational analysis myself.

What I would definitely not say that "in the face of massive unpredictability, the best way to make budget decisions is to pick the path that is cheapest" - I'd say that could go really very badly wrong...
+12 Rank Up Rank Down
May 14, 2013
While I agree that in business budget constraints can fuel creativity, and the sequester was entirely overblown, there is one important reason why those same constraints don't work for government. When a government department faces budget cuts, it is actually in the department's self-interest to cut the most visible and necessary elements of their work, rather than the dead weight. This in turn hurts the voting public, who in turn demand Congress restore the budget to the previous level. It is referred to as the "Washington Monument syndrome" (and it has its own Wikipedia page: http://en.wikipedia.org/wiki/Washington_Monument_Syndrome). If there was some way to force the subordinate departments to maintain the same level of service while under the budget cuts, we'd see the creativity you refer to. Unfortunately, that necessary part of the budget cut bill(s) never seems to make it in.
+20 Rank Up Rank Down
May 14, 2013
The other thing that's important to know about the sequestration cuts is that they were "cuts" in the Washington DC sense, which doesn't mean the affected areas of government got less money than the year before. No, it means the affected areas of government got a smaller increase of money compared to last year than they were previously promised. This is called baseline budgeting and is one of the biggest obfuscations of truth that goes on in our federal government.
+1 Rank Up Rank Down
May 14, 2013
So let's cut the budget to nothing and that will spur the most creativity. Seriously.

+10 Rank Up Rank Down
May 14, 2013
On the other hand, Scott, if I'm one of those department managers in your bank, you've incentivized me to waste money as much as possible, so that when the next round of across the board budget cuts hits, I can adapt!

Whether I'm a department head for a bank or a government agency, why should I be careful with shareholder / taxpayer money, if that's not going to be "rewarded" with less severe cuts? In both the worlds, we all see the stories about how "all the money has to be spent" or it will be taken out of the budget next year. Ridiculous.

May 14, 2013
Parkinsons Law
-1 Rank Up Rank Down
May 14, 2013
So how does the Adams Law of Slow-Moving Disasters factor in apathy? The world, despite knowledge of the impending doom of climate change, is continuing to barrel directly towards it with the accelerator to the floor.

[99.999% of the world can be totally apathetic so long as a few influential engineers and scientists figure out a solution, as has always been the case. There is no chance of a political solution, but that might not matter. Some experts argue that there are simple changes to the way we farm that could reverse the problem. I think a reasonable person could be 100% sure climate change is real while also not worrying about it. -- Scott]
May 14, 2013
Add a 10% tax on Congressional perks(speaking fees etc.) and you might have something.
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