American Budgeting is in Decline

The Federal government’s total outstanding debt is quickly approaching $21.5 trillion. Debt held by the public (that is, not including the debt owed to government trust funds like Social Security) is now almost $15.8 trillion. The debt totaled $475 billion forty-four years ago when Congress passed the law regulating how the federal government budgets - the Congressional Budget Act. Since then, it has increased from 31percent of the economy to 104 percent.

Incentives to Borrow

Debt takes advantage of our tendencies towards loss aversion. The government raises money by issuing bonds that it promises to pay, with interest, in the future after some period of time. It is clear that the public has become more accepting of this practice, even in peacetime. Public acceptance reflects a belief that lending the government money is a good investment strategy (which is correct when the net present value of the bond is more than the taxes paid). People who inherit the bonds are no better, or worse, off in the deal as long as debt today equals taxes tomorrow.

When do we pay for government debt that is driven higher by tax cuts (or spending increases)? In recent history, never. We mainly have the strength in the U.S. dollar overseas to thank for that circumstance. Therefore, buying the government's debt is quite a good strategy for both foreign and domestic investors.

The attractiveness of government debt has allowed the government to issue debt independent of the revenues it collects, which is a practice that has been going on for some time. For instance, the new federal income tax revenue raised in the first two years after the enactment of the War Revenue Act of 1917 would have paid for all of the debt accumulated between 1789 and 1917 three times over. Moreover, yet we never paid off the debt accumulated by entering World War I.

You can make the argument that there’s an opportunity cost of debt. Investors could otherwise spend their money on something besides government debt. Are there investment opportunities that exist at present that are more sound than betting for the soundness of the dollar? No, or the fundamentals of the debt market would not be as strong as they otherwise are. People are willing to buy government debt at meager interest rates.

Government Spending and Debt Accumulation

What is driving debt accumulation? Another way to phrase this question is, what government programs grow at rates that exceed the growth in tax revenue? Alternatively, what government programs grow faster than the economy (assuming that growth in revenue cannot exceed economic growth over any sustainable period)?

The answer is a small fraction of programs. I've estimated that out of all government spending accounts only 2 percent drive debt accumulation. That means that most of what the government spends money on does not increase the debt over the long-run. However, the 2 percent of programs I have identified account for 60 percent of gross spending. In other words, these programs are primarily responsible for the accumulation of debt.

For much of American history, warfighting costs have driven debt increases. Policymakers have long borrowed money to fund necessary wars without discouraging public opinion. Consequently, the debt skyrocketed during all of our major wars. Moreover, it tended to fall in peacetime. In contrast, countercyclical spending or war-fighting costs are not driving new debt accumulation. Beginning in the 1960s with the creation of public health insurance programs (primarily Medicare, Medicaid, and now Obamacare) the budget composition changed. Once predominantly comprised of discretionary spending, the budget is now comprised of mostly entitlement healthcare programs.

Transformation of the Budget Process

Many political changes occurred that ultimately changed the focus of budgeting reforms around the same time that the budget composition took a turn from funding for wars to subsidizing medical care. Democrats controlled by the House and the Senate for 44 of the 48 years between 1933 and 1981. Before that period, Republicans had control of the House and Senate for 14 years. Therefore, for the entire existence of the modern budgeting (since the enactment of the Budget and Accounting Act of 1921 establishing the framework for the budgeting system) one party controlled the Congress even though the other party occasionally controlled the White House.

Consequently, process changes were intended to maintain the legislative "power of the purse" by restricting administrative actions. This motivation reflects two hundred years of budgeting history which featured a power struggle between the Congress and the presidency. Whether or not it was banning transfers of appropriations or prohibiting deficient appropriations, the budget process changes that occurred before the 1980s were primarily all about Congress establishing (and re-establishing) its enumerated powers.

The budget reforms of 1974 reflected this theme as well. For example, the restrictions on presidential impoundment were in direct response to President Nixon’s unprecedented use of the budget tool (he had withheld 15 percent of the total appropriated spending the year before). At the same time, the Congressional Budget Act was a way to establish more of a congressional presence in the processing and evaluation of the administration’s budget.

However, what has happened since 1974? Democrats lost control of Congress. Moreover, when they did the focus of budget reforms first turned to limit the power of the majority party rather than the presidency. However, both parties have since embraced the strategy of tying the hands of legislators. In 1985, Congress adopted new rules on budget reconciliation bills that would ultimately make it difficult to enact the policies reflected in budgets. Limits were placed on discretionary budget authority (i.e., appropriated amounts) but not on actual spending by the 1990 Budget Enforcement Act. More recently, Congress has placed a moratorium on earmarks that are proposed by legislators but not by the president.

Budget Process Reform

Congress no longer budgets because its members have made it very difficult to do so. They no longer take the president’s budget very seriously either. Ignoring such efforts is a problem if you believe that the millions of hours spent producing the administration's spending and tax plans could be better spent doing something else.

This wasted effort has led some scholars to recommend reforms to incentive Congress back into the habit of budgeting. They seem to think that some budgeting is better than no budgeting and that more budgeting is better than less. They do this by proposing that each new Congress should have a more accessible path to breaking past fiscal commitments but also to set new budgetary obligations. They would also soften (or eliminate) legislative deadlines through the statutory limit on the debt because, well, politicians hate voting to increase the debt.

However, this exercise has caused me to ask, what are the problems with the federal budget? There are a lot of them. I mean, we could get rid of budget gimmicks. We could better account for financial risk. We could develop budgets accounts that make more sense and increase transparency. However, how much will any of this matter? The answer is not much.

It won't matter because Congress is not interested in dealing with the significant risks associated with more spending and more debt. This spending is on autopilot – the programs that Congress doesn't have to deal with on an annual basis through the budget process to continue the status quo. Moreover, why should they be? The American people – the very constituencies that send them to Washington – are addicted to debt because it is a good investment and the entitlement programs driving the debt are popular.

Therefore, the question comes back to, what are we trying to accomplish with budget process reform? Do we believe that more budgeting is inherently better than less? Will making the budget process more transparent encourage members of Congress to budget any better than they do currently since the American public does not appear to care much about the budget process in the first place?

The underlying problem driving this dysfunction is that members of Congress are unwilling to govern. In other words, they are reluctant to make difficult decisions that protect future generations from exposure to risk today. Their reluctance will persist with or without a better budget process. Therefore, perhaps we should spend more time thinking about the fundamentals (i.e., how do we reform entitlement programs to make them more sustainable?) rather than on what seems to be a micro issue of congressional process. Moving forward, members of Congress will change how they budget when they believe that the status quo is no longer acceptable. When they do, scholars must be ready with meaningful reform proposals.