It's both amusing and frustrating to observe the reaction to President Trump's budget.
I'm amused that it is generating wild-eyed hysterics from interest groups who want us to believe the world is about to end.
But I'm frustrated because I'm reminded of the terribly dishonest way that budgets are debated and discussed in Washington. Simply stated, almost everyone starts with a "baseline" of big, pre-determined annual spending increases and they whine and wail about "cuts" if spending doesn't climb as fast as previously assumed.
Here are the three most important things to understand about what the President has proposed.
First, the budget isn't being cut. Indeed, Trump is proposing that federal spending increase from $4.06 trillion this year to $5.71 trillion in 2027.
If America descends into Greek-style fiscal chaos, there's no doubt that entitlement programs will be the main factor. Social Security, Medicare, Medicaid, and Disability are all fiscal train wrecks today, and the long-run outlook for these programs is frightful.
Just look at these numbers from the Bank for International Settlements and OECD to see how our fiscal future is bleaker than many of Europe's welfare states.
Simply stated, if we don't implement the right kind of entitlement reform, our children and grandchildren at some point will curse our memory.
But that doesn't mean we shouldn't worry about other parts of the budget, including the so-called discretionary programs that also have been getting bigger and bigger budgets over time.
That's why I want to add some additional analysis to Veronique de Rugy's recent piece in National Review Online, which might lead some to mistakenly conclude that these programs are "shrinking" and being subject to a "Big Squeeze."
...there is another number to look at in that budget. It’s the shrinking share of the budget consumed by discretionary spending (spending on things like defense and infrastructure) to make space for mandatory spending and interest. This is the Big Squeeze. ...in FY 2014 mandatory spending plus interest will eat up 67 percent of the budget, leaving discretionary spending with 33 percent of the budget (down from 36 percent in FY 2012). Now by FY 2023, mandatory and interest spending will consume 77 percent of the total budget. Discretionary spending will be left with 23 percent of the budget.
She's right that discretionary spending is becoming a smaller share of the budget, but it's important to realize that this is solely because entitlement outlays are growing faster than discretionary spending.
Here's some data from the Historical Tables of the Budget, showing what is happening to spending for both defense discretionary and domestic discretionary. And these are inflation-adjusted numbers, so the we're looking at genuine increases in spending.
As you can see, defense outlays have climbed by about $100 billion over the past 50 years, while outlays for domestic discretionary programs have more than tripled.
If that's a "Big Squeeze," I'm hoping that my household budget experiences a similar degree of "shrinking"!
Veronique obviously understands these numbers, of course, and is simply making the point that politicians presumably should have an incentive to restrain entitlement programs so they have more leeway to also buy votes with discretionary spending.
But I'd hate to think that an uninformed reader would jump to the wrong conclusion and decide we need more discretionary spending.
Particularly since the federal government shouldn't be spending even one penny for many of the programs and department that are part of the domestic discretionary category. Should there be a federal Department of Transportation? A federal Department of Housing and Urban Development? A federal Department of Agriculture?
No, NO, and Hell NO. I could continue, but you get the idea.
The burden of federal government spending in the United States is far too high and it should be reduced. That includes discretionary spending and entitlement spending.
P.S. For those who don't have the misfortune of following the federal budget, "entitlements" are programs that are "permanently appropriated," which simply means that spending automatically changes in response to factors such as eligibility rules, demographic shifts, inflation, and program expansions. Sometimes these programs (such as Social Security, Medicare, Medicaid, etc) are referred to as "mandatory spending."
The other big part of the budget is "discretionary spending" or "appropriations." These are programs funded by annual spending bills from the Appropriations Committees, often divided into the two big categories of "defense discretionary" and "nondefense discretionary."
Much to the horror of various interest groups, it appears that there will be a “sequester” on March 1.
This means an automatic reduction in spending authority for selected programs (interest payments are exempt, as are most entitlement outlays).
Just about everybody in Washington is frantic about the sequester, which supposedly will mean “savage” and “draconian” budget cuts.
If only. That would be like porn for libertarians.
In reality, the sequester merely means a reduction in the growth of federal spending. Even if we have the sequester, the burden of government spending will still be about $2 trillion higher in 10 years.
The other common argument against the sequester is that it represents an unthinking “meat‐ax” approach to the federal budget.
But a former congressional staffer and White House appointee says this is much better than doing nothing.
Here’s some of what Professor Jeff Bergner wrote for today’s Wall Street Journal:
You know the cliché: America’s fiscal condition might be grim, but lawmakers should avoid the “meat ax” of across‐the‐board spending cuts and instead use the “scalpel” of targeted reductions. …Targeted reductions would be welcome, but the current federal budget didn’t drop from the sky. Every program in the budget—from defense to food stamps, agriculture, Medicare and beyond—is in place for a reason: It has advocates in Congress and a constituency in the country. These advocates won’t sit idly by while their programs are targeted, whether by a scalpel or any other instrument. That is why targeted spending cuts have historically been both rare and small.
Bergner explains that small across‐the‐board cuts are very reasonable:
The most likely way to achieve significant reductions in spending is by across‐the‐board cuts. Each reduction of 1% in the $3.6 trillion federal budget would yield roughly $36 billion the first year and would reduce the budget baseline in future years. Even with modest reductions, this is real money. …let’s give up the politically pointless effort to pick and choose among programs, accept the political reality of current allocations, and reduce everything proportionately. No one program would be very much disadvantaged. In many cases, a 1% or 3% reduction would scarcely be noticed. Are we really to believe that a government that spent $2.7 trillion five years ago couldn’t survive a 3% cut that would bring spending to “only” $3.5 trillion today? Every household, company and nonprofit organization across America can do this, as can state and local governments. So could Washington.
And he turns the fairness argument back on critics, explaining that it is a virtue to treat all programs similarly:
Across‐the‐board federal cuts would have to include all programs—no last‐minute reprieves for alternative‐energy programs, filmmakers or any other cause. All parties would know that they are being treated equally. Defense programs, food‐stamp recipients, retired federal employees, the judiciary, Social‐Security recipients, veterans and members of Congress—each would join to make a minor sacrifice. It would be a narrative of civic virtue.
It’s worth noting, however, that the sequester would not treat all programs equally. Defense spending is only about 20 percent of the budget, for instance, yet the Pentagon will absorb 50 percent of the savings (though defense spending still increases over the next 10 years).
At the risk of oversimplifying, the sequester basically applies to so‐called discretionary spending. So‐called mandatory spending accounts for a majority of federal spending, but it is largely exempt, so entitlement reform will still be necessary if we want to address the nation’s long‐run fiscal challenges.
Following the House’s passage of a six‐month continuing resolution last week (my comments on the CR here), House Appropriations Committee Chairman Hal Rogers (R‑KY) chatted about fiscal policy with a couple of reporters on C‑SPAN. The interview did nothing to change my 2010 opinion that the House leadership handing Rogers the chairman’s gavel was “about as inspiring as re‐heated meatloaf.”
While Rogers is correct that domestic discretionary spending represents a relatively small share of total spending (approximately 12 percent) and that entitlement spending is the bigger problem, his comment that “we’ve just about reached the bottom of the barrel” on such spending is a stretch. Domestic discretionary spending has dropped, but after a sizeable increase during the 2000s. And arguably more important than the dollar amount this category represents are the activities being funded. For example, the federal government shouldn’t be spending a dime on the Department of Education, which is mostly discretionary spending.
When it comes to the other side of the discretionary spending coin—military spending—Rogers parrots the standard GOP line that sequestration would be “disastrous.” That’s nonsense. Perhaps Rogers is worried that cuts to the bloated military budget will crimp his ability to dole out the goods to defense contractors back in his district (see, for example, Rogers’s $17,000 drip pan).
That leads to Rogers’s most galling comments. When asked about earmarks, the “Prince of Pork” bemoaned his alleged inability to help shovel taxpayer dollars to his district since the practice was halted two years ago. Rogers said that “it hurts me that I can’t advocate for that governmental unit that’s in some desperate need.” What hurts me is that Rogers has to nerve to cite the Constitution to justify legislative earmarking (i.e., Congress’s “power of the purse”). As my colleague Roger Pilon and I have noted, the debate over the power of the executive versus that of the legislative branch to spend is constitutionally relevant and important. As Roger says, however, “it’s the growth of spending, most on matters unauthorized by the Constitution that is far and away the larger problem.” Federal subsidies to state and local governments largely belong in the unauthorized category.
In the Washington Post Friday, Ezra Klein partly confirmed what I fear the Republican strategy is for the debt‐limit bill—get to the $2 trillion in cuts promised through accounting gimmicks. As I have also noted, Klein says that there is about $1 trillion in budget “savings” ($1.4 trillion with interest) to be found simply in the inflated Congressional Budget Office baseline for Iraq and Afghanistan. Klein says, “I’m told that a big chunk of these savings were included in the debt‐ceiling deal” that Rep. Eric Cantor (R‑VA) and Sen. Jon Kyl (D‑AZ) are negotiating with the Democrats.
Republican leaders have promised that spending cuts in the debt‐limit deal must be at least as large as the debt‐limit increase, which means $2 trillion if the debt‐limit is extended to reach the end of 2012. In a Daily Caller op‐ed, I noted that you can find $1 trillion in “savings” from this phony war accounting and another $1 trillion by simply pretending that non‐security discretionary will stay flat over the next decade.
There is more evidence that few, if any, real spending cuts are being discussed. One clue is that the media keeps quoting Joe Biden essentially saying that it was easy to reach agreement on the first $1 trillion in cuts.
The other suspicious thing is that the media keeps floating trial balloons for specific tax hikes, but I’ve seen very few trial balloons for specific spending cuts. Friday, the Washington Post story on the debt discussions mentions all kinds of ideas for raising taxes on high earners. A few days ago, news stories revealed that negotiators were talking about changing tax bracket indexing to create annual stealth increases in income taxes. The only item I’ve seen being discussed on the spending side is trimming farm subsidies.
If Republican and Democratic lawmakers were really discussing major spending cuts, then the media would be full of stories mentioning particular changes to entitlement laws to reduce benefits and stories about abolishing programs widely regarded as wasteful, such as community development grants.
I hope I’m wrong, but this is starting to look a lot like the phony $100 billion spending cut deal from earlier this year.
Sean, Rush, Greta, Glenn, Bill: When you get Republican leaders on your shows, get them to promise that they won’t use phony baseline accounting like war costs to reach the $2 trillion in cuts. The budget and the nation desperately need real cuts and real government downsizing.
House Speaker John Boehner has promised to tie substantial spending cuts to upcoming debt‐limit legislation. He said spending cuts will have to be at least as large as the dollar value of the allowed debt increase. Thus, if the legislation increased the legal debt limit by $2 trillion, then Congress would have to cut spending over time by at least $2 trillion.
How can we be sure that spending cuts are real?
There are only two types of solid and tough‐to‐reverse spending cuts—legislated changes to reduce entitlement benefit levels and complete termination of discretionary programs. Republicans will have to define what time period they are talking about, but let’s assume it’s the standard 10‐year budget window.
- Entitlements: The legislation, for example, could change the indexing formula for initial Social Security benefits from wages to prices. The Congressional Budget Office says that change would reduce spending by $137 billion over 10 years (2012–2021). Other options include raising the retirement age for Social Security and raising deductibles for Medicare.
- Discretionary: Each session of Congress decides the following year’s discretionary spending. Promises of discretionary spending cuts beyond one year are meaningless. Thus, the various promises in Republican and Democratic budget plans to freeze various parts of discretionary spending through 2021 or reduce spending to 2008 levels over the long term have no weight. Those are not real cuts.
The only way to get real cuts in discretionary spending—cuts that would be tough to reverse out in later years—is complete program termination and repeal of the program’s authorization. That way, policymakers in future years would generally need at least 60 votes in the Senate to reinstate the spending.
Thus, if the GOP promises to save $50 billion over 10 years by reducing the levels of Title 1 grants to the states for K‑12 schools, that is not a real and solid cut. However, if they pass a law to repeal Title 1 spending altogether, that cut may well be sustained over the long term.
To make spending cuts even more secure, the GOP should also insist on a statutory cap on overall outlays with a supermajority requirement to break, as I’ve outlined here. For program termination ideas, see www.DownsizingGovernment.org.
In sum, the GOP needs to ensure that spending cuts tied to the debt‐limit vote are either:
- Changes to entitlement laws to reduce benefit levels, or
- Discretionary program terminations.
Promises to hold down future discretionary spending levels and partial program trims are not real spending cuts.
When it comes to reining in federal spending, House Republicans and the president have one idea in common: freezing nondefense discretionary spending. That category accounts for about 18 percent of total spending, so let’s see how such a freeze would affect the overall budget.
Today the Congressional Budget Office released updated budget figures and baseline projections of federal spending through fiscal 2021. Projecting the budgetary future is obviously an inexact science, and the CBO’s baseline reflects unrealistic assumptions. However, it does allow us to get an idea of the impact of a nondefense discretionary freeze on total federal spending.
Three proposals have been put forward:
- In his State of the Union address, President Obama proposed freezing nondefense discretionary spending for five years, beginning in fiscal 2012, at fiscal 2010 levels.
- The conservative House Republican Study Committee and Sen. Jim DeMint (R-SC) recently proposed freezing nondefense discretionary spending for ten years, beginning in fiscal 2012, at fiscal 2006 levels.
- Ever since the release of its “Pledge to America,” the House Republican leadership has been talking about returning spending to fiscal 2008 levels. They apparently have non-security discretionary spending in mind, which is an even smaller category than nondefense discretionary. It’s not clear if they intend to freeze it at the new lower level.
Using the CBO’s latest figures, I calculated baseline spending from fiscal 2012-2021 under ten year freezes in nondefense discretionary spending at fiscal 2006, 2008, and 2010 levels:
Note: To make an apples-to-apples comparison, I extended the proposed Obama freeze at fiscal 2010 levels from five years to ten years, and I assumed a ten year freeze at fiscal 2008 levels for the House Republicans. Also, projected annual interest payments on the debt are excluded. Therefore, the chart refers to “baseline program spending,” which is the sum of nondefense discretionary, defense, and entitlement spending.
The chart makes it excruciatingly clear that freezing nondefense discretionary spending at the levels specified or implied by Republicans and Democrats is only a start toward needed reforms in the federal budget. Congress also needs to cut defense spending, and spending on Social Security, Medicare, Medicaid, and other entitlement programs.