Can the Federal Budget Process Be Fixed? Mercatus Capitol Hill, 1/22/09

1. Can the Federal Budget Process Be Fixed?Mercatus Capitol Hill, 1/22/09 Roy T. Meyers Professor of Political Science, UMBC meyers@umbc.edu

2. Sections of my talk • The current budget situation • Problems with the current budget process • Why these problems exist, and what it might take to change the process • Pros and cons of alternative reforms • Qs and As

3. These slides available at: • http://userpages.umbc.edu/~meyers/mercatusmeyers.ppt • Supporting paper (“The Ball of Confusion in Federal Budgeting”) can be found at: http://userpages.umbc.edu/%7Emeyers/abfmfridayplenary.pdf This paper will be published in March 2009 Public Administration Review

4. I. The current budget situation • FY09 • 10 year budget projections • The recession • The stimulus

5. FY09 budget projection • Current estimate of deficit = $1.2 trillion • 8.3% of GDP, highest since 1945. . . • Projection does not include effects of stimulus bill • Includes risk-adjusted accrual estimates for TARP (>$180B) and Fannie/Freddie ($238B) • Borrowing requirement (addition to debt held by public) about $200B > deficit

6. Realistic 10 year projections show continued problems • Budget law requires perhaps unrealistic assumptions for baseline projections • Adjusting baseline to “current policy” means: • no scheduled tax increases • continued war spending • discretionary growth that matches GDP growth rather than inflation • Result: deficits that average > 5% of GDP

7. The deep recession justifies a huge stimulus • Financing even more borrowing is feasible because of the “flight to safety” • But investors will not forever accept “return-free risks” • Fact: we shopped, now we’ve dropped • Potential consequence: exploding debt dynamics threaten even the U.S. • We must be disciplined—starting now

8. So even the stimulus bill deserves scrutiny • Will tax cuts be spent, or saved? • Will funds spend out as rapidly as promised? • Will jobs be created, or bottlenecks occur? • Were projects previously unfunded because they offered lower benefits? • Will new spending be temporary, or be built into base?

9. II. Commonly-asserted budget process problems • Hasn’t produced sustainable outcomes • Is too complicated and often misleading • Takes too long; at times, unfinished • Encourages excessive partisanship

10. “Haircut” deficit projection by GAO/Fiscal Wake Up Tour

11. Too complicated and often misleading • “The content of an actual budget resolution is notoriously useless for almost any user”--SBC Republican staff, 3/13/08 • Scoring practices are hard to understand and subject to gimmickry--e.g., non-urgent emergencies; PAYGO benefit shelves and unlikely offsets

12. Too long; at times, unfinished • Budget resolutions were not passed for fiscal years 2003, 2005, 2007--all election years • Late appropriations bills are the rule rather than the exception • even though this ensures inefficient budget execution by agencies and grantees • Why were appropriations not finished for FY09?

13. Excessive partisanship • Blaming the other side has taken priority over solving policy problems • “Democrats are calling for the largest tax increases in history”–though Republicans were unwilling to score the full cost of tax cuts • “Republicans have spent nearly $1 trillion on the war”--though many Democrats voted to authorize that war and its appropriations

14. III. Questions about institutional explanations and possibilities • Do strong parties help or hurt? • Are deficits too tempting under unified government? • Are American political institutions more generally inimical to fiscal responsibility? • Where are the missing institutionalists? • Will President Obama deliver on the signature phrase of his inaugural: a “new era of responsibility”?

15. Don’t strong parties promote accountability? • Because the voters know who to blame • Remember Tom DeLay? Leadership became more influential; chairs chosen not by seniority • Unified party control 2001-6: large tax cuts and large spending increases replaced Republicans’ balanced budget rhetoric • Does such “irresponsible party government” makes divided government look good in retrospect? • But didn’t divided government produce the 1995-6 shutdown and gridlock?

16. Are the temptations facing unified government too great?

17. Are our political institutions more generally to blame ? • Large legislatures are too decentralized to budget responsibly • Frequent elections motivate legislators to concentrate on parochial concerns • Interest groups fund campaigns, and then demand subsidies • Many voters are uninformed and myopic • Presidents can fail to lead (“43”)

18. So perhaps the problem is not the budget process itself? • “The process is not the problem; the problem is the problem”--Rudy Penner, CBO Director, 1983-87 • A useful corrective to those who unrealistically thought a constitutional amendment to balance the budget would automatically reduce the deficit • Yet in Washington, many people think very carefully about how processes generate specific results • A flawed budget process protects the budgetary status quo

19. Those who can solve that problem: “institutionalists” • Willing to forgo actions that would bring temporary personal and partisan advantages but that over the long run would hurt the institution • Work tirelessly to promote norms, and to design organizational structure and procedures, so that the institution’s members will cooperate and thus make better decisions

20. Will anyone in today’s Congress emulate Bolling and Dirksen? • Some committees of jurisdiction have been relatively inactive: e.g., H Rules--only 5 (nonproductive) hearings in last 8 years; none since 2005 • Other committees have been quite partisan • 2006 SBC SOS Act reported 12-10, but not considered on floor • 2008 HBC budget resolution: 10 Republican budget process amendments, defeated by party-line votes • Not enough centrists anymore? • ‘45 to ‘74 included abnormal number of conservative Democrats and liberal Republicans

21. Will Obama change the tone? • “Post-partisan” rhetoric of “hope” and “change” rhetoric was more uniting than dividing. . . • But campaign promises would increase deficit significantly • Has appointed centrist deficit hawks, promised to hold “fiscal responsibility summit,” reform entitlements, and eliminate spending that doesn’t work • Can he manage the transition from “hope” to “nope”?

22. Is the time ripe for reform? • On the tax side, expiring legislation in 2011 could force action • Previous budget process reforms were stimulated by: • Aggressive Presidents (signing statements=impoundments?) • Low approval ratings of Congress (led to 1974 Act) • Weak economy (1987 crash led to 1990 BEA)

23. IV. Alternative approaches to budget process reform • Increase transparency • Change the schedule • Prevent actions • Force actions • Connect to macroeconomic goals • Count differently • Emphasize priority-setting • Scrutinize spending and tax preferences

24. Earmark reform • Many deficit hawks hate the recent emphasis on earmarks: “chump change” • Most pork busting amendments have failed • Pork-busting hypocrisy is rife: e.g., 11 Republicans who voted to kill the “Woodstock” earmark had 13 earmarks in the same account • Transparencymay increase the “personal vote” through certification of credit-claiming • Revealed disparities in earmark allocations may increase demand

25. But pork-busting has worked a bit • Number and amount of earmarks have declined • Recent rules change limit ability to airdrop earmarks in authorization conference reports • Recent pledges by Inouye-Obey: reduce earmarks to 50% of previous total, require web posting of requests • Reformed procedures better than alternatives? • Line-item veto requires a constitutional amendment • Expedited rescissions would lengthen the process--just what we need!

26. My modest proposal • Cap total earmarks each year in the budget resolution • Distribute earmarks equally by district and state--aka “District Dollars” or “State Dollars” • Allocation of individual earmarks would be by legislator (as now), or ceded to district/state officials (like General Revenue Sharing) • BUT earmarked funds would be available only when all 12 appropriations bills are presented to President by 9/30 • creates a collective good incentive to pass appropriations bills on time

27. Increase transparency for more than earmarks • Presidential campaigns, and later budgets, now include too much propaganda • A popular budget report (like those released periodically in our past) could explain the basics of budget projections and alternatives to voters • could be certified by a team from CBO, GAO, and private sector • The next step: replicate Australia’s “Charter of Budget Honesty” • requires the Treasury/Finance to cost out candidates’ election promises prior to a general election

28. Change the schedule • But not through biennial budgeting • Could free up time for concentrated review of programs through authorizations and oversight? • But it is unlikely that Congress would not budget in the would-be “off year” • Instead, try a joint budget resolution (JBR)—budget resolution signed by the President • fear that a JBR would shift power to the President ignores reality--the President already has veto power • if it was expected that the President and Congress would agree on aggregates early, then they might

29. Prevent actions: the Budget Enforcement Act, version 2.1 • Discretionary spending caps • Limits on discretionary emergencies • Reconciliation must save minimum amount • Tougher PAYGO • but recent rules changes: exemptions for war, terrorism, natural disaster, sustained low economic growth; multi-bill offsets • All of these will work, unless they won’t--that is, it’s up to Congress to refuse to waive such rules • Such rules (e.g., Senate supermajority/points of order) are already numerous and confusing

30. Force actions • Soft trigger for general revenue funding of Medicare requires Presidential proposal of solution and expedited consideration • 45% trigger level is arbitrary • House rules change this year: no expedited procedures • Hard triggers (fixed deficit targets; automatic “across-the-board” cuts”) would resemble Gramm-Rudman-Hollings

31. Bipartisan Task Force for Responsible Fiscal Action • Suggested by Senators Conrad and Gregg • Proposals considered on fast-track, but 3/5 support required in each house • Wouldn’t absolve legislators from blame if entitlement spending is cut or taxes increased • Many legislators would refuse to cede their authority—before or after

32. Connect to macroeconomic goals • A possibly more realistic commission approach: Pew-Peterson, self-appointed • Broad enough composition, open minded about alternatives, taken seriously? • Could consider discretion vs. fiscal rules: • Ceiling for public debt • Budget balanced over business cycle • Surplus to finance entitlements • Deficits to finance public investments

33. Count differently--baseline and scoring • There are no easy answers here; how to treat expiring provisions is not the only question • The 1967 Budget Concepts Commission created the unified budget and overemphasized the cash deficit—witness TARP, etc. scoring • A new Commission could examine accruals, capital, and many other complicated issues not well addressed in existing scorekeeping rules: http://userpages.umbc.edu/~meyers/cboconference.pdf • We especially need to think comprehensively about public AND private health care spending

34. Emphasize priority-setting • Budgeting now focuses on the aggregates (e.g., deficit) and the details (appropriations) • The “missing middle” of the budget process is priority-setting • budget resolution debates, functional allocations, and “reserve funds” do not help set priorities • budget functions are misaligned with committee jurisdictions--if the greatest budget challenge we face is health, shouldn’t there be a health committee? • GAO’s call for national indicators to inform budget debates is sensible and doable • similar processes exist in leading states: VA, OR

35. Priority-setting requires radical changes • Realignment of committee jurisdictions: • to better match budget functions • combining authorizations and appropriations • Periodic “sectoral reviews” that review goals and results for major policy concerns • already done well in leading Westminster countries (UK, Canada, Australia, NZ) • While few talk about such proposals on the Hill, other countries view our system as archaic • Through the World Bank and IMF, we now require poor countries to set explicit priorities • should we do as we say others should do?

36. Scrutinize spending and tax preferences • GPRA performance measures and PART analyses provide much useful information for determining what we can’t afford • though PARTs are aptly named--they ignore tax expenditures, but shouldn’t • Bush Administration didn’t sufficiently explain how performance affected budget requests • Obama administration shouldn’t start from scratch • How can legislators learn that using such information isn’t electorally dangerous? • That’s your challenge!

37. Qs and As • Fire away! • I would be happy to meet with Members/Senators and staff to discuss these and other budget process reform issues • 410-455-2196 • meyers@umbc.edu