Topic: Tax and Budget Policy

A Key Reform for Budget Process Reform

Senate Budget Chairman Judd Gregg’s “Stop Over-Spending” (SOS) plan, announced last week aims at reinstating tight fiscal controls — after letting them erode over many years by gutting pay-as-you-go budget rules and pushing through massive supplemental spending outside of the regular budget process.

The proposal includes a line-item veto for the President to cut wasteful spending and a bipartisan commission for devising solutions to entitlement program shortfalls. 

Its main focus, however, is to set deficit caps tied to mandatory spending cuts similar to the Gramm-Rudman-Hollings Deficit Control Act from the mid-1980s.  That act, however, proved ineffective and had to be revised multiple times.

The key to whether lawmakers are really serious about budget process reform is whether proposed changes are based on short-term deficit measures or forward-looking long-term unfunded obligation measures. 

Spending control laws based on short-term budget measures are likely to mislead policymakers into adopting inadequate or inappropriate reforms.  Imagine if we were to determine the need for Social Security reform based on its net cash flow today–which is in surplus.

And we’ve been here before–we thought the pay-as-you-go constraints from the Budget Enforcement Act had done their job and turned them off in 2002–only to see a federal spending spree like never before.  If adopted (which appears unlikely) SOS may work for a time, but history is likely to repeat itself.

The key to a budget process is the budget measures on which spending constraints are based.  Using the same old budget measures will not deliver a new process.  It’s time to make fundamental changes by adopting more appropriate fiscal yardsticks.  Unless budget measures fully reflect the budget problems that lie ahead and correctly reflect the consequences of policy changes, we will continue to lurch from one reform to the next without making any improvement–at best.

Budget Mission Accomplished?

The crew over at National Review Online authored an editorial today in which they suggest that President Bush might soon be able to take a victory lap. Why? Because the deficit is shrinking faster than anyone thought it would.

Fresh data from the Congressional Budget Office shows that the deficit-to-date for the current fiscal year is $50 billion smaller than it was this time last year. Since President Bush declared that one of his second-term goals would be to cut the deficit in half (as a share of GDP) by 2009, the NRO editors all-but-suggest that it might soon be time for the White House to recycle those old “Mission Accomplished” banners.

Yes, the economy is growing faster than anyone anticipated, and that’s very good (if underreported) news. This has led to a larger-than-expected boost in tax revenue, too – so unexpected, in fact, that Congress and the President haven’t been able to find ways to spend it all, although that’s not for lack of trying. Ergo, the budget deficit shrinks.

But if you look beyond the self-congratulation, you might notice how far Republicans have retreated from the battle for limited government (as I explain in my forthcoming book). When Republicans won control of Congress in 1994, they promised elimination of the budget deficit in seven years – a promise they were able to make good on in just three years. Now the GOP’s fiscal Maginot line has been drawn at merely halving the deficit in five years. That this less-than-impressive goal might be achieved sooner than later is really a tiny consolation.

Besides, a single-minded focus on the yearly budget deficit causes the GOP to draw their eyes off what should be the real prize: A reduction in the size of government altogether. Is there a good reason, for instance, why supporters of limited government should prefer a balanced budget that swallows up 20% of the U.S. economy to one that eats 18.4% as it did in 2000?

It looks like we might just have to settle for the former. According to the most recent data available, gross domestic product grew by 6.8% since last March. But federal spending ballooned by 9% over the same period. The U.S. economy has substantial ground to cover to make this a competitive race.

Or, think of it this way: If the federal budget had grown from the day George W. Bush was inaugurated at the same annual rate it had for the six years before he came to office, the federal budget would consume only 17% of GDP today. And it would be balanced, even after taking into account the tax cuts. Instead, the budget is still unbalanced today and government spending hovers around 20%.

This fall, Republicans will likely trumpet the news of the incredible shrinking deficit as an unsung victory for small-government conservatives. That the economy is getting better is something to which the mainstream press should be paying more attention. But the news on the deficit is only a very small victory, however, and one that hardly proves that the GOP is still a party of small government.

Payday on Capitol Hill

This week, House lawmakers “approved” a $3,300 increase to their current $165,200 salaries. Most appalling about this increase is not its fiscal impact, which is very small relative to the federal budget. Rather, it is the despicably clandestine process by which it is routinely passed.

Because of a 1989 law that makes congressional pay raises automatic, Congress very rarely actually votes to increase lawmakers’ pay. They can voluntarily block the raise and did so five times in the ’90s. But since 1999, they have accepted the automatic increase every year and used procedural tactics to table any discussion or vote on the matter.

In March, the Senate tried to go one step further, approving a measure that would deny pay raises to any individual senator or congressmember who votes against a pay increase. The measure would have also denied pay raises to members who opposed the procedural vote to block consideration of the pay raise.

Sound complicated? Well it is. Congress has quite intentionally shrouded the entire process to keep the public from paying attention. And they can hardly be blamed. Given their track record of late, does anyone actually believe these guys deserve more money?

Starving and Feeding the State Beast

This is an ongoing debate regarding the Starve the Beast theory of federal government finance – do reductions in revenues lead to less spending and increases in revenues to more spending?

A casual look at data in a new report by the National Association of State Budget Officers indicates a clear Starve the Beast pattern at the state level. (See Table 2 on page 3.)

In years when revenue growth was slow – early 1980s, early 1990s, and early 2000s – state legislators moderated their spending increases (they are generally required to balance their budgets each year). In years when the economy was booming – late 1980s, late 1990s, and now – revenues flooded into state coffers and legislators spent with abandon. To correct for the excessive budget expansions we see during booms, there is a movement in many states to impose tighter caps on overall budget growth so that revenue booms trigger automatic tax reductions.

By the way, with state budget increases of 6.5 percent last year and 7.6 percent this year, isn’t it time state politicians started returning some of the current revenue gusher to the people through major tax cuts?  

Voluntary Charity vs. Government Charity

Chris Edwards’ post on FEMA brought to mind a 2002 New York Times article, which I recently found on FreeRepublic.com. The article concerned fiscal shenanigans at the United Way, and FreeRepublic.com allowed readers to post comments. The following were representative:

“Why anyone would give money to (through) the United Way so they can skim their take is beyond me. Pick your favorite charity or cause, and give to them.”

“If anyone at work asks you to give through United Way, point them to the Salvation Army. The difference is like night and day.”

Pity we never see comments like:

Why anyone would give money to FEMA is beyond me. Pick your favorite charity or cause, and give to them.

If anyone at work asks you to contribute to Medicaid or Food Stamps, point them to the Salvation Army. The difference is like night and day.

As I told a (hostile) room of graduate social work students this morning, when charity is coerced, charities don’t have to try nearly as hard.