The only way to achieve true fiscal discipline: Learn arithmetic

Arithmetic and history.  Two of my favorite subjects in school.  I covered some history two posts ago (the Whisky Rebellion).  Let’s do some arithmetic now.

Attention is currently focused on threats of a government shut-down, either when a continuing resolution is required from Congress in March in order to keep the government operating, or a few months later, when an increase in the national debt ceiling is required.  The common description of this showdown as a high-stakes game of chicken has it right.   But some of the Tea Partiers say that their goal is literally to avoid an increase in the debt ceiling – not just as a bargaining ploy nor as an abstract goal, but in the sense that they want to cut spending so sharply that there is no need to borrow any more after this spring.   Similarly, Senators Mike Lee (Utah) and John Kyl (Ariz.) have revived the proposal for a constitutional amendment requiring a balanced budget.  And of course they all want to do it without raising taxes, and in most cases without cutting defense, Social Security or Medicare.   Oh, and don’t cut farm subsidies either.

Not many people want to spend the time learning about the specific options or making the choices that would be necessary in order genuinely to solve the budget situation, even though a couple of useful websites make it relatively easy to think through the alternatives (NYT or PPC).  

But the proposition that we could eliminate the budget deficit through sufficiently drastic cuts in domestic spending is so far out of line with reality, that the point can be made easily to even the most innumerate congressman.  Here is the arithmetic. 

Total federal spending is $3 ½ trillion in round numbers.    That spending number minus tax revenue left a budget deficit of $1.3 trillion in fiscal year 2010.   Putting aside a very small number of genuinely sincere libertarians like Ron Paul, most Republican congressmen want to exempt defense spending and senior-related spending (Social Security and Medicare), and to make all the cuts in non-defense discretionary spending.  (That was their official platform in November’s election.)     How much would you have to trim non-defense discretionary spending to balance the budget?   Start — as many people would like to – by eliminating all foreign aid.  Contrary to what they think, foreign aid is of course only about 1% of total outlays.  Next imagine zeroing out all of veterans’ benefits, all federal spending on education, and all federal spending on transportation.   That includes programs so popular with their beneficiaries that the congressmen voting for them would be virtually certain to lose re-election.  But some of the freshmen say they are willing to pay that price, so let’s go full speed ahead.   We are only up to 6% of total outlays.   Now eliminate every dime of non-defense discretionary spending: parks, weather service, food safety, SEC, FBI, border patrol, politicians’ salaries… everything.  Do you think that closes the gap?    It only gets you half way there!   Domestic discretionary spending is not where the big bucks are.

The arithmetic in fact works out quite simply.    Of the $3 ½ trillion in federal outlays, just under 1/5 is non-defense discretionary spending.   Another 1/5th is defense.   Social security is the third 1/5th.    Medicare is the fourth 1/5th (slightly less now, but far far more in the future).    The last 1/5th is interest on the debt (which will also grow enormously in the future) plus other entitlements.    Numerically speaking, we would have to eliminate not just all non-defense discretionary spending, but also all defense.  Or else all social security spending (but we would have to continue somehow collecting the payroll taxes that are supposed to fund it!).   Or else all Medicare spending.   The unmistakable implication is that a solution to our long-term fiscal problems will have to involve some sharing of sacrifice among each of these five categories.    And increased tax revenue as well.    

Admittedly, the Republican leadership’s goal for the current fiscal year was to reduce domestic spending by “only” $100 billion.   But the freshmen’s position is that this goal is not enough.  (At the same time, they are unable to come up with that much in specific cuts that they are willing to put their names to, for the same familiar reasons.  Domestic discretionary spending is not where the money is.)

A reasonable medium term goal might be to raise taxes as a share of GDP at least to 18%, what it was during the Reagan administration, and to lower spending to 23%, what it was then as well.   Of course these two numbers still leave us with a deficit of 5% of GDP, which was Reagan’s record.  It will take us much longer to get back to the fiscal rectitude of Clinton.   It is not possible to eliminate the need to borrow, in the short run.   

As for the long run, as we all know, the baby boomers are starting to retire and the trends in Social Security and (especially) Medicare are unsustainable.   Ten years ago, if the country thought it was important enough to protect any single category against belt-tightening in the long run – say social security or taxes – it would have been arithmetically possible, by making the cuts elsewhere.    But we no longer have the luxury of such choices after the legacy of the last decade — after the effects of mammoth tax cuts (starting in 2001 and 2003), two wars (2001, 2003), the Medicare prescription drug benefit (2003), and the severe financial crisis and recession (2008).   Starting from our current position, each of the five components must play a role, along with taxes.

Many commentators faulted President Obama for not proposing to cut entitlements when he submitted his budget in early February. They sanctimoniously intone that a true leader would realize that the public wants to hear the truth.   I don’t understand how they can say that with a straight face.   Obama came into office with a mature desire to put childish things aside and a naïve eagerness to be bipartisan.  The response he got was accusations of death panels, an explicit Republican strategy to deprive him of legislative successes (no matter what their content), and the electoral defeat of moderate congressmen in both parties. People who say that Obama should stick his neck out to support some of the radioactive proposals of the Bowles-Simpson deficit-reduction commission have apparently forgotten that he originally asked for ex ante bipartisan blessing for the formation of the commission and a congressional vote on its recommendations, but the Republicans refused.  

It is clear as day that if he broached the sort of specific proposals that are necessary, such as raising the retirement age in the distant future, he would be attacked simultaneously for hurting seniors and for not going far enough fiscally (and it would in many cases be the same people making both attacks, inconsistent as that is).  The point is not just that he would hurt himself politically.  The point is that the inflammatory attacks on the proposals would then entrench positions and make it harder to enact the reforms in the future, not easier.  The White House has explained the danger of “poisoning the well.”  There is no alternative to preserving the true remedies for some future venue where both sides are willing to join hands and make the necessarily compromises together.   We have known this political fact for 30 years.  Savvy media commentators would do the same if they were working in the White House; but they don’t consider that criterion relevant when fashioning their critiques.  They have their own audiences to play to.

Democrats should not rise to the bait of “fiscal conservatives”

I never cease to be frustrated that the current public policy debate is described as a contest of ideas: fiscal conservatives versus liberals.   It is not just Republicans or Tea Partiers who believe that they are fiscal conservatives, no doubt sincerely.   Democrats and liberals seem to accept this characterization at face value, as does most of the media.  

The problem is that a heavy majority of the supposed fiscally conservative congressmen, although passionate about cutting government spending in the abstract, are in truth no better able to find specific dollars of budget cuts that they can support or defend to their constituents than are the Democrats.   Factoring in their immutable desire to cut taxes, I believe that if the Republicans were in full control, we would have larger budget deficits in the coming years than if the Obama crowd retained power.  This is what happened in a big way when Presidents Reagan and GW Bush took office promising to cut the debt while also cutting taxes.   Spending, deficits, and debt soared during their terms, relative to their respective Democratic predecessors.  There is no reason to think anything has changed. 

The first thing the Republicans did after their congressional victories in the November election was achieve their precious extension of the Bush tax cuts for the wealthy.  This extension will raise the budget deficit by more than all the domestic spending cuts that all of the Congressional freshmen have identified put together. 

Next they turned to their campaign to kill Obamacare.  It was a surprising achievement one year ago when President Obama managed to pass a health reform bill that simultaneously would improve medical treatment while bending down the cost curve in the long run (through such policies as persuading hospitals to cut down on unnecessary surgery and to reduce infections).   But it is even more surprising that the conservatives can continue to get away with simultaneously tarring the reform as “death panels” while refusing to acknowledge that it will cut costs.   Their plans for going back to our previous health care system include suspending their own rule that bills that would increase spending (as determined by the non-partisan Congressional Budget Office) must be paid for.

The zeal to cut funding for such tiny programs as the National Endowment for the Humanities and Planned Parenthood is accepted as evidence of the sincerity of the fiscal conservatives.  I wish the Democrats would not fall for that bait.  Their anguish over such cuts, while understandable, plays into the old narrative of big versus small government.  The same with the bigger, but still small, categories of domestic spending such as food stamps.  The Right reacts to such liberal anguish with glee, while the Center infers – less vindictively, but no more accurately – that such cuts are part of a painful but necessary fiscal adjustment.    Losing the center is no way to put together a political majority. 

Yes, fiscal adjustment is necessary.   I might even think that such cuts would be a price worth paying, if they were a proportionate component of a comprehensive plan to address the long-run fiscal situation.   But they are nothing remotely like that.   Rep. Paul Ryan’s supposedly tough long-term plan to cut spending doesn’t balance the budget until 50 years from now and runs up another $62 trillion in national debt in the meantime, as Matt Miller and others point out.  Moreover, as everyone knows, the cuts that the House passed last week are not going to take effect anyway:  the Senate and the presidential veto render them all but irrelevant.   As usual, it is all about perceptions.  I don’t think the perception should be that Democrats stand in the way of fiscal responsibility. So I would prefer to divert the narrative from the unenlightening and sterile debate of small versus big government, to the realities of arithmetic and history.


The Tea Party protestors really mean whiskey, not tea

Evidently the four-word slogan “No Taxation Without Representation” is too complicated to fit on some people’s bumper stickers.  They have chopped off the last two words.  They don’t want taxation period.

The “Tea Partiers” revere the Constitution. But some might lack the knowledge of early American history that they claim.  In honor of George Washington’s birthday, February 22, I would like to recall a bit of that history.

The Boston Tea Party is not in fact the most appropriate historical precedent for the grass roots protests that have received so much attention over the last year.  The famous slogan motivating the patriots in Boston Harbor in 1773 was “No Taxation Without Representation.”  But democratic representation was achieved with the American Revolution. The Whisky Rebellion of 1794 is a much closer parallel for today’s protestors.   Or the earlier Shays’ Rebellion of 1787, the episode of anarchy to which many Americans reacted by seeking a federal constitution.    The pitchfork-carriers in these rebellions were protesting against taxation with representation.   They did not want to pay the taxes necessary to fund the government services they enjoyed — which at that time meant servicing the debt from the Revolutionary War. (Sound familiar?)  President George Washington, not the rebels, was defending the Constitution against its first severe test, when he personally put down the Whiskey Rebellion with force.   

Incidently, the rebels had no appreciation of good public finance theory either, needless to say.  Theory urges taxing a beverage the excessive consumption of which imposes high costs on others.  Whiskey, rather than tea. President Washington, and his Treasury Secretary, Alexander Hamilton, probably understood that principle.  Today, it means taxing fossil fuels more (and payrolls less).