All in favor of responsible budgeting, say aye
01/04/16 Filed in: Spending
See reader comments posted at the end.
SAFE member Dick Timberlake has written several books on monetary policy over the years, most recently “Constitutional Money,” Cambridge University Press. Cato Institute forum, 4/24/13.
We’re delighted to kick off the New Year with Dick’s suggestions re restoring sanity to the federal budgeting process. Here’s his essay, which is followed by our comments in black font.
A Budget Red-Line for the Federal Government
By Richard H. Timberlake
Eighteen trillion dollars and increasing by a trillion dollars a year! That is the reported dollar value of the United States’ national debt. But just how much is $18 trillion? The human mind can only imagine a few thousand of anything. So how can we assimilate the magnitude of $18 trillion? Even if everyone knows that $18 trillion is eighteen times one thousand billion, we are still numbed.
A recent study by a forester, Thomas Crowther, at Yale University has done research on forests that may provide a handle to answer this question. Crowther determined by satellite measurements, deductions, and ground measurements that the total number of trees on Planet Earth is slightly more than 3 trillion. This number has increased steadily over many decades, partly due to small fractional increases in carbon dioxide, and the miniscule increase in global temperatures.
Besides being of interest in itself, this finding is useful for getting a glimpse of what the number “one trillion” means. Everyone can see millions of trees while driving to work from suburban residences, and everyone can imagine this minute perspective expanded to include all of Earth’s forests. At least, it’s a start.
Given this datum--18 trillion dollars of debt and steadily increasing--if the dollars were trees, the current national debt would include all the trees on SIX Earths. Of course, this monstrous amount cannot be paid off by taxation: no polity would suffer such a burden. But the very fact of the debt’s ‘infinity’ suggests the very real possibility that, under enough pressure, the government would monetize it. Monetization would only require the Federal Reserve to engage in extreme “quantitative easing,” that is, buy the outstanding debt and pay for it by printing new dollars—a procedure the Fed has been using routinely for decades.
If this much debt were monetized, all market prices would increase astronomically. By the same token, dollar prices of fixed dollar assets, such as ordinary bonds, dollars in bank deposits, and dollars of hand-to-hand currency, would stay constant and therefore lose purchasing power. Such a hyperinflation would be a tax that would equal the rate of price level increase on everything priced in dollars. It would only end when people abandoned dollars as a medium of exchange. This scenario is already in the history books. The post-World War I German government promoted it in 1920-23. It was the inevitable result of the debt burden imposed on Germany by the Treaty of Versailles.
In order to prevent the debt from getting to the point where the only solution is monetization and hyperinflation, the growth in the total dollar value of the debt must be brought to zero—0. Congressmen all know that spending more than is taxed is only too easy when no other constraint, such as a true gold standard, is there to rein in the spendthrifts. Consequently, Congress must agree on a yearly budget Red-Line—a total number of dollars that it may spend but will not breach under any circumstances.
Currently, Congress is spending about $4 trillion a year, but taxing “only” about $3 trillion—or one dollar for every tree on Earth. While this volume of spending is surely enough for any one year—it was enough for the fiscal year 2007--it is not enough for an unconstrained government that has lost its constitutional anchor. Therefore, some newly devised constraint that everyone could accept must be substituted. Here it is:
The budgeting process in Congress starts with individual congressmen, who present their priorities to the budgeting committees. The committees then have 535 individual preferences, and the Joint Committee on the Budget then totals up a discretionary budget that includes some parts of every congressman’s wish list. The end result is a budget that mirrors last year’s spending total with additional allowances to adjust for special demands. Such a budget does not include any statutory restraints. There is no budget red-line beyond the wishes and good intentions of the budgetary committees. Every year the new budget is greater than the previous year’s, both the dollars to be spent and dollars to be taxed.
Every householder knows that the only way to constrain a budget is, first, to set the limit—a Red-Line--on the total number of dollars that the family will spend, then prioritize spending. So Congress, once it has agreed on an upper limit—the Red-Line—would debate, iterate, brow-beat, and cry over the various causes which congressmen think those tax dollars should support. However, with the prior Resolution on a Red-Line, the total number of dollars defined by the Red Line would stand. Any one congressman’s pet project could only be enhanced by wheeling and dealing with other congressmen.
But how can a Red-Line be agreed upon in the first place? Where can such a Red-Line come from, and what are its properties? Most important, how can we get a Congress to pass any law that constrains Congress itself?
An accounting Budget Red-Line that would do the job is the sum-total of all the revenues collected by the federal government during the preceding budget-year. For 2016, for example, the Red-Line would be the total taxes paid into the federal government in all of 2015, which will be something over the $3,000,000,000,000 discussed above. Whatever the exact amount, the accounted tax total is immediately available from the Congressional Budget Office (CBO), and is known to the last dollar. It is a total that every congressman can understand, and, more important, agree to as a logical spending limit. No one could criticize the fairness of such a determinate value: Here are the total number of dollars we have to spend. No matter how we divide it up, we will keep spending at or below this total.
The Red-Line total would not address any particular spending project. Every congressman would understand that his/her own pet project could still be included. But to get it included, a congressman would have to “log-roll”—negotiate, compromise, and probably give up a little, to get some part of his/her share. No longer would you-vote-for-mine-and-I’ll-vote-for-yours-and-we’ll-both-vote-for-more. The “more” would be gone.
This proposed Red-Line is similar to a balanced budget amendment, but it starts with the spending total already decided on the basis of what will surely be available from taxes already in place. It does not address the complex issue of taxation, leaving that problem for separate argument.
It does not reduce the obese level of annual spending that has become today’s norm. It only stops the lard from getting worse.
It stabilizes but does not reduce the national debt. However, the very fact that total government spending would be limited is a very strong argument for new investment and enhanced economic development. In such case tax revenues would likely increase and provide a somewhat greater Red-Line for spending in future years.
Finally, bargaining for more under a Red-Line would logically reduce significantly the Dead-Weight-Losses—the inherent real costs of the taxing process that help no one and return nothing for the taxes collected. Congressmen would have an incentive to winnow out these costs so that more would be available for their “real’ needs.
If this procedure were followed every year by means of a Budget Resolution, the government’s budget might still grow slightly, but it would always be constrained and under control. Best of all, the national debt would stop growing, and our children and grand-children would no longer be threatened by their ancestors’ ineptitude.
Yearly deficits soared following the enactment of a huge fiscal stimulus package in February 2009, purportedly to counteract the “Great Recession,” and the gross national debt now stands at nearly $19 trillion. For fiscal years 2009-15, the average annual deficit was just shy of $1T, as shown in this table. Office of Management and Budget (historical table 1.1, accessed 1/1/16).
*Updated to final numbers: 2015 deficit smallest since before recession, Joseph Lawler, Washington Examiner, 10/7/15.
The administration has characterized the current deficit level as satisfactory on grounds that an annual deficit of some 3% of GDP should be “sustainable.” Reverse engineering the president’s budget, 2/9/15.
In contrast, Timberlake’s essay urges that the federal government implement the Budget Red-Line approach before the current debt plus anticipated future borrowings lead to a fiscal calamity. That’s generally consistent with the position SAFE has taken previously, which is that the government should balance the budget within three years and thereafter keep it that way. Postelection update: Deficits & debt, 11/24/14. The BRL would be even more severe, however, in that it would limit budgeted outlays to actual receipts for the previous fiscal year versus estimated receipts for the current year.
“Cold turkey” implementation of the BRL would shock the DC establishment, to put it mildly. Here’s a hypothetical example using the president’s fiscal year 2016 budget proposal as the starting point.
A procedural complication is that about 2/3 of the total budget is currently running on autopilot, i.e., outlays are paid as provided by law without formal appropriations. If “mandatory” spending was off limits, the reduction in “discretionary” spending would be on the order of 60%!
A predictable tactic in the ensuing budget battle would be the proposed defunding of popular and highly visible programs (the US military, highways & bridges, national parks, etc.) in order to save programs that could quite reasonably be slashed or eliminated. If there is anything previous budget battles have demonstrated, it is the distaste for targeted spending cuts to eliminate programs, operating units, or activities that are not justified on a cost versus benefit basis. Every program has its supporters and beneficiaries, and no one wants to be the killjoy who rains on their parade. Time to get serious about budgeting, 1/20/14.
There would also be unprecedented pressure for additional tax revenues, probably including a “temporary” value added tax. Technically the BRL would not permit budgeted tax increases to be used as a basis for upping budgeted outlays, but a workaround of some type would surely be allowed if the idea of tax increases gained sufficient traction.
To put the BRL in place, a Constitutional amendment would presumably be required – along the lines of previous proposals for a Balanced Budget Amendment (BBA). SAFE is on record as favoring such an amendment if the support therefor ever materializes. Spending (budget discipline)
A balanced budget amendment to the Constitution, either prohibiting deficit spending except in time of declared war or requiring a 2/3 majority to approve deficit spending in any given year, would be a tremendous help – if it could be adopted.
The nice thing about the BRL is that it would be very easy to administer. Everyone would know up front what the limit on total outlays was going to be, and they could plan their legislative strategies accordingly. But in the end, the only way to get the budget balanced is to first win the argument (thank you, Maggie Thatcher) about what type of government this country really wants and how much Americans are willing to pay for it.
Thanks for running my essay on the BRL and the associated commentary. Just one thing, I think this requirement could be adopted as an amendment to the congressional budget procedures without a constitutional amendment. The key would be convincing a solid majority of Congress that the BRL is an essential strategy to address the corrosive budget problem. I hope that we can get some other groups to support the BRL as well – Dick Timberlake (Georgia)
I wonder if we could get one or more of the presidential candidates to adopt this idea as a campaign item. If the country could get used to a BRL then perhaps the day would come that the BRL budget could be reduced by, say, 1% each year and thereby get the debt down. The real problem is that many (most) economists believe that 2-3% inflation is good economics--and politicians love it!! – SAFE member (Delaware)
Unfortunately, the corrupt politicians in Washington don`t agree with us, & the political philanthropists who took an oath to support the Constitution (hah!) continue their wastrel ways, knowing the pathway to long-term incumbency is squandering taxpayer dollars on their special interests, unrelated to spending tax dollars on items specified in the Constitution as functions of the central government. So clearly the time has come to return taxpayers to a long-held American value - no more taxation without representation. - SAFE member (Arizona)
My suggestion would be a line-item code for all spending by all departments and agencies with the understanding that if the total was exceeded the leader of the organization, department or agency would be fired. The lines should be coded so that Congress could easily erase a line in a given account and vacate the process or group. The Executive Branch would not be permitted to expand spending in any sub-account unless authorized by Congress. – SAFE director