Tag: spending caps

Sequestration Is a Small Victory for Budget Hawks

The budget battles in Washington, D.C., are far from over. President Obama’s attempt to break the stalemate by reaching across the aisle and dining with GOP members two days in a row seems more about show than substance. 

The apparent lack of urgency to undo the cuts underscores what we knew all along: the world did not end under sequestration. Most of the cuts will be phased in over the next few months. The defense cuts amount to just 6.5 percent of total spending on national security (Pentagon base budget plus war costs). This is a pittance, and spending will still dwarf what we spent before 9/11. Those who claim that the cuts will undermine American security should explain how we managed to win the Cold War while spending much less, on average. (To learn more about proposals that would maintain a highly capable, but less costly, military, attend our event on March 14th.) 

There is still the possibility that most of this year’s cuts, or the caps on planned spending over the next decade, may not materialize. Congress could reverse the cuts in the future as part of a grand bargain. Or they could simply punt without one. Meanwhile, legislation is moving along that would allow the Pentagon and other agencies to implement the cuts with greater discretion across department programs. This is a good thing, potentially. Smarter cuts are desirable, but we should be on the lookout to ensure that Congress doesn’t simply legislate away any cuts, dumb or otherwise. 

Nonetheless, the fact that military spending actually declined is a small victory. But how will future battles play out? Are the neocons and their supporters in retreat? In a piece running today at Foreign Policy, I offer a cautionary note. Just because the fiscal hawks won this time doesn’t mean that they’ll win the next one, or the one after that: 

The defense contractors and special interests still have enormous firepower in Washington, and they’ve turned their attention to the “continuing resolution” that will fund the government for the remainder of the year. Meanwhile, the neoconservatives are single-minded and relentless. Their tenacity paid off in their bid to launch a war in Iraq and depose Saddam Hussein, but failed to stop Chuck Hagel’s nomination and eventual confirmation as secretary of defense.

The budget fight matters even more. A $470 billion military is more than sufficient to fight the wars the United States truly needs to fight, but not the wars that the neocons want to fight. The next phase in the fight over the Pentagon’s budget should focus less on how much the United States spends on defense, but rather why it spends so much. If we are going to give our military less than it expected to have three or four years ago, we need to think about asking it to do less.

Read the full article here.

Defense Spending Hasn’t Been Cut by $600 Billion

Beltway politicians like to pretend that smaller spending increases amount to spending “cuts.” As Dan Mitchell has pointed out numerous times (see here for one example), that’s baseline budgeting baloney. Now that the 2011 Budget Control Act’s spending caps are in place, politicians are making an even more ridiculous claim: the so-called “cuts” have already occurred.

The caps apply to spending over ten fiscal years – the last year being 2021. We are obviously not in the year 2021, so it’s impossible for the so-called “cuts” to have already been implemented. Yet here are two examples from a recent Politico article where politicians suggest that to be the case:

“There are people that think we need to cut more,” House Armed Services Committee Chairman Buck McKeon (R-Calif.) acknowledged in an interview. McKeon said he’s been pushing back against budget hawks in the GOP conference by pointing to the nearly $600 billion in spending cuts that the Pentagon has already absorbed in recent years — and that’s before sequestration would even begin.

“I think there’s spending that can be taken out of all departments,” said freshman Rep. Ted Yoho (R-Fla.). “And I’ve talked to people from the Pentagon. There’s just areas that, yeah, we can pull back a little more, even though they did their $470 billion already. They said it hurt, but we possibly could.”

I’ll cut Rep. Yoho a little slack because the article indicates that he’s open to cutting defense. Rep. McKeon, on the other hand, deserves no such leniency. (Why McKeon said $600 billion and Yoho $470 billion I have no idea.)

The following chart illustrates why it is ridiculous to act as if smaller future increases in projected spending amount to realized spending cuts. The chart shows the Congressional Budget Office’s August 2001 baseline estimate of defense spending from 2002 to 2011 versus the actual outlays:

The combined difference turned out to be $1.8 trillion.

But, you might respond, those estimates were published a month before the attack on September 11th, 2001, so of course they turned out to be way off!

And that’s my point. With the exception of Keynesian economists, no one can predict the future. All it will take is another major terrorist attack or another war and it’s adios spending caps. I would argue that such unfortunate scenarios are a distinct possibility given the Beltway crowd’s love for empire, but I’ll leave that topic to Cato’s foreign policy experts.

Federal Budget Cap at 3%

The federal government is approaching its legal borrowing limit, and fiscal conservatives in Congress are wondering what spending reforms they can extract in return for supporting a debt-limit increase. Various sorts of balanced budget amendments and debt limits relative to GDP are being kicked around. I support those ideas, but I fear that they may be too complicated to gain traction right now.

A simpler idea would be to impose a statutory limit on annual spending growth of 3 percent. If total federal outlays in a year were $4 trillion, the government couldn’t spend more than $4.12 trillion the next year. It would be that simple.

Such a limit would be easy for policymakers and the public to understand and enforce. It would put ongoing pressure on Congress to cut discretionary programs and reform entitlements. With spending growth limited to 3 percent, the budget would be balanced in just over a decade and growing surpluses would be generated after that. The federal government would shrink as a share of GDP. The math is simple: federal revenues and GDP are expected to grow substantially faster than the 3 percent spending limit over the next decade and beyond.

I want Congress to enact major cuts to spending, not just to limit spending growth. But one advantage of an annual growth cap is that it would lock-in any spending cuts that are made, and thus spending would be ratcheted downwards.

Under such a limit, the OMB and CBO would issue regular reports showing spending for the coming fiscal year relative to the projected legal cap, which would make it clear to political leaders, reporters, and voters how much needs to be cut. The president would also be required to propose a budget each year that fit under the estimated legal cap. If the beginning of a new fiscal year arrives and spending is still expected to be above the limit, the president would be required by law to impose an across-the-board cut to bring spending into line.

In the past, I’ve proposed a spending growth cap equal to the sum of inflation plus population growth. (This sum is expected to be about 3 percent in coming years). But a fixed and explicit percent cap would be even simpler and easier to enforce. A fixed percent cap would also encourage policymakers to support a low-inflation policy by the Fed because the lower was inflation, the higher the budget limit in constant dollar terms.

The chart shows the proposed spending in Obama’s new budget compared to spending capped at 3 percent. The spending cap line assumes that the GOP’s discretionary cuts are put in place this year. It also assumes that spending grows at the maximum 3 percent each year, but if spending were restrained more than that, the cap would ratchet down to a lower level. The chart also shows projected federal revenues based on CBO data, assuming the extension of current income tax cuts and AMT relief. (See page 22).

Limiting spending growth to 3 percent is a modest goal, but over time the results would be quite dramatic compared to Obama’s no-reform spending plan. Spending in 2021 would be about $1 trillion less than the president is projecting—$4.7 trillion rather than $5.7 trillion. As a share of GDP, Obama’s 2021 spending of 23.9 percent would be cut to 19.9 percent. And the budget would be closing in on balance that year with revenues at 18.6 percent of GDP with tax relief in place. (Figures based on OMB GDP).

At DownsizingGovernment.org, I’ve proposed spending cuts that would take the federal government down to 15 percent of GDP or less. But getting a new budget mechanism signed into law takes centrist support, and I think that a 3 percent growth cap to balance the budget in a decade or so is a reasonable goal that could gain broad agreement.

Finally, it makes sense to include in such a budget law the ability of policymakers to spend over the cap temporarily for emergency war funding with a two-thirds vote in both House and Senate. Without such a temporary escape hatch, Congress would likely simply repeal the law when it entered a costly war.

I’ve discussed a spending growth cap in more detail here and here and here. Dan Mitchell has made similar observations about spending growth rates. The folks at One Cent Solution are recommending a tighter cap.