Ending the budget wars

For the second time in two years the U.S. has stepped back from the precipice of default.  As part of the compromise passed by Congress a conference committee under leadership of Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) was charged to come back by December 13 with a compromise version of the federal budget between the Republican-controlled House and the Democratic-controlled Senate.

In January, absent agreement to the contrary, a second sequestration will go in effect and on February 7, 2014 the nation would face yet another debt ceiling crisis.  The inability of the so-called supercommittee to reach a compromise when given a similar task in 2011 is enough reason for pessimism.

The budget deficit in FY 2013 was 4.1 percent of GDP with federal outlays of 22.7 percent of GDP and revenue collections of 16.7 percent of GDP.  While the budget deficits under President Obama have been large they need to be put into some perspective.  The FY 2013 year deficit was just less than half the size in dollar terms as the last year of the Bush budget. Federal spending thus far in his administration has averaged 22.6 percent, compared with 22.3 percent under Reagan  while the revenue collected under Obama – due to legacy of the Bush tax cuts – have averaged a mere 16.0 percent compared with 18.0 percent under Reagan. In fact, three of the five lowest revenue generating years in terms of GDP in the past fifty years took place under the first four Obama budgets (FY2010-13).            

While this history is interesting, the most important thing at the moment is to ensure that the U.S. not repeat the history of the past two years.  Toward that end the following four principles are offered for consideration:

  • Although the Republican Party has rightly been punished by public opinion for its behavior in bringing about the recent shutdown, the President should use that advantage as leverage to ensure that there is no act three next year.  He should not use it for strictly partisan benefit.  The financial issues facing the nation are really not about the size of next year’s deficit, but rather in coming to terms with ominous actuarial trends in entitlements in such a way as to not stifle the economic growth that is truly needed to solve the problem.  The work of the Murray-Ryan committee is important, but what Americans want is a longer-term solution.  The president made one pass at this before with the discarded Simpson-Bowles plan.  He should now use his office to provide the leadership for a comprehensive, long-term plan. Kicking the can down the road is not an answer.
  • The debt ceiling law passed in 1917 has been superseded by the Congressional Budget and Impoundment Act of 1974, is inconsistent with Congress’ tax and spend authority under Article I Section 8 of the Constitution and seems squarely at odds with the Fourteenth Amendment.  The debt ceiling is a useless law that gives cover to some members of Congress to have a symbolic vote to “demonstrate” fiscal discipline while ignoring the issue on all of their remaining votes.  It is time for Congress to quit playing games and declare the debt ceiling law void.
  • The state of infrastructure in the United States is deplorable for the world’s leading economy.  Many of these projects would yield large returns on capital.  Any long-term budget solution should shift the US from a cash-based to an accrual-based capital expenditure budget system as used by large businesses.  Given the potential for accounting gimmickry such a system would have to be subject to strict standards and oversight.
  • Finally, the American public understands that a long-term solution requires a balanced approach addressing revenue as well as spending.  In war, stalemates are often settled on the basis of the status quo ante bellum, and it is proposed here that future budget wars be settled, if necessary, on the situation in effect before the deficit or status quo ante defuerit.  The last balanced budgets occurred under the Clinton administration which averaged Federal outlays of 19.4 percent of GDP. Absent agreement to the contrary, both taxes and spending would then be adjusted within a reasonable time period into balance at that level unless there were a national security or economic emergency. While it is true that the nation cannot go on spending as it has over the past five years at levels 13.4 percent above the average for the last half century, neither can it go on generating revenue 24.6 percent below the fifty year average needed to fund federal expenditures.

A long-term solution requires that no one come into the talks with preconditions and that everything be on the table.  One sign that a successful accord has been reached is that no one walk away from the table completely happy.  It is necessary.  The time has come.

Wise is an Annapolis businessman who frequently comments on public affairs.