Our nation’s budget process is broken, and fixing it will take political courage, something remarkably lacking in our nation right now.
President Bush’s proposed budget certainly did not inspire great cheering this week. In itself, that does not mean much. Every budget submitted over the past 25 years has motivated some member of Congress to pose before cameras and declare that the president’s proposals are “dead on arrival.”
This is all part of an elaborate political game. Presidents regularly propose tax or spending changes that they know will never be enacted. Members of Congress rail against specific budget items, knowing they will go through anyway. For both parties, the chance to make political hay outweighs the substance of the issue.
Journalists respond as they do during elections, by focusing on the horse race rather than on the merits of proposals. Will a specific tax or spending change be enacted and why or why not? Society as a whole does not pay sufficient attention to the underlying choices we face.
There are two sets of effects from the proposed budget. First are the specific trade-offs society faces in proposed changes in taxing or spending. Then there are the long-term effects of the overall budget — total revenue, outlays and related deficit — on the economy as a whole.
The first set attracts the most attention, however, because it affects households most visibly. The president proposed a 5 percent cut in farm subsidies. That would be a $50 million or so reduction in payments to Minnesota farmers. Most of the effects will fall on 20,000 or so farm households that have significant crop or dairy income.
The budget also contains large increases in defense spending, both for normal operations and to buy new planes, ships and other equipment. This could mean increased business for Minnesota manufacturers like Alliant Techsystems or BAESystems. Employment may increase, and jobs in the defense sector generally pay pretty well.
The budget also proposes reductions in Social Security benefits to survivors and cuts in Medicaid eligibility and payment rates. These changes probably will affect more Minnesota families than any other provision.
On the revenue side, the budget preserves tax reductions on investment income but does nothing to change the Alternative Minimum Tax, which affects more households each year.
Citizens will differ on the merits of such specific provisions, depending on their perceptions, priorities and values. Our democratic political system exists to reconcile such differences of opinion.
The effects of federal taxing and spending on the larger economy might be more important in the long run. Standard indicators like gross domestic product, employment and inflation show that the U.S. economy is doing pretty well right now, and certainly better than two years ago. The 2007 budget keeps taxes pretty much the same. Spending changes, however controversial, won’t change trends in outlays very much. Once again, we will run a substantial budget deficit.
Whether this is harmful or benign depends on which economic theory you find convincing. The Keynesian ideas, which dominate the perspective of most journalists and politicians, hold that a strong economy is the time to cut spending, raise taxes and to run a budget surplus rather than a deficit.
The supply-side theories held by many Bush administration economic advisers shun Keynesian efforts to counter economic fluctuations. For them, consistently low taxes and minimal regulation of economic activity are key elements. The Bush budget is consistent with these views. Historically, supply-siders were not advocates of large budget deficits, but the current cohort seems to accept these as an evil necessity to maintain low tax rates.
I think it’s safe to say that the majority of economists still find the administration’s blasé attitude toward deficits troubling. The rapid growth in the national debt — largely financed by a few Asian central banks — is not sustainable, particularly in light of pending retirement of millions of baby boomers.
Many members of Congress apparently share such concerns. But even modest spending cuts proved difficult this past year and there is little support for higher taxes. Current deficits are like sled runners caught in ruts in the ice. Yet we continue to glide forward along a predetermined path even when it apparently leads right into a big tree.
As noted above, taxing and spending always have involved political trade-offs and gamesmanship. But the level of cynicism seems particularly high right now. The administration once again excluded funds for the war in Iraq from the proposed budget.
The administration will again seek the necessary money in a supplemental “emergency” request later on. It is a credit to Senate Republicans like John McCain and John Warner that they oppose such manipulation. But Congress has allowed the “earmarking” of funding for bridges in Alaska and artificial rain forests in Iowa to grow at unprecedented rates in recent years. The budget process is broken, but there is plenty of blame to go around.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.