A personal note to you, my readers and friends.
My latest book, Dead Men Ruling, is in many ways the most important that I have ever written. I try not only to diagnose the disease that underlies so many of our economic and political problems today, but also to attack the wrong-headed notion that we live in an age of austerity and limited possibility.
Consider: the gross domestic product per household is $141,000 today and is projected, even with slower growth, to reach $168,000 in 10 years. Over that same period under Republican and Democratic budgets alike, government at all levels is likely to increase spending and tax subsidies from $55,000 to around $65,000 per household. Our budget may be terribly allocated, and the way we tax and spend can be quite inequitable, but do these numbers suggest a nation that must continue to turn its back to the ocean of possibilities that lie right at our feet?
I hope you will read Dead Men Ruling. Even more, I hope that you recommend it to friends and elected officials who want to move beyond yesteryear’s stale debates toward a 21st-century agenda—particularly when it comes to promoting opportunity and mobility, prioritizing children and their future, and creating a government that can be both effective and lean.
If you cover the news, are organizing an event, or have a group interested in the book, I can help. Please contact me.
Because I make no money on the book, my motivation is purely aspirational. I strongly believe that the country is at an inevitable turning point, requiring honest leadership. Though it will take time, together we can make that turn well.
At DeadMenRuling.com, you can order copies directly and find many related recommendations, videos, and interviews. As a Government We Deserve reader, you can use discount code KCD4. Or you can use various book venders (including Amazon).
To tease your interest a bit further, I include the preface below.
Low or zero growth in employment… inadequate funds to pay future Social Security and Medicare bills…declining rates of investment… cuts in funding for education and children’s programs…arbitrary sequesters or cutbacks in good and bad programs alike… underfunded pension plans…bankrupt cities…threats not to pay our nation’s debts… inability to reach political compromise…political parties with no real vision for 21st century government.
I’ve come to a strong belief that these and a whole host of seemingly separable economic and political problems are symptoms of a common disease, one unique to our time and shared widely throughout the developed world. Unless that disease and the history of how it spread over time is understood, it’s easy to fall prey to believing in simple but ineffective nostrums, hoping that a cure lies merely in switching political parties or reducing the deficit, expanding our favorite program, or hunkering down to protect it. My first purpose in writing this book is to accurately diagnose that disease so we can attack it at its roots
But my fonder hope is that we reawaken to the extraordinary possibilities that lay right at our feet and restore the American can-do spirit that has prevailed over most of our history. Despite the despairing claims of many, we no more live in an age of austerity than did Americans at the turn into the 20th century with the demise of the frontier. Conditions are ripe to advance opportunity in ways never before possible, including doing for children and the young in this century what the 20th did for senior citizens, yet without abandoning those earlier gains. Recognizing this extraordinary but checked potential is also the secret to breaking the political logjam that, as I will show, was created largely by now dead (and retired) men.
What to do about the tax extenders—or, as my colleague Donald Marron calls them, the “tax expirers”? Restoring the current crop (most of which expired on December 31) for 10 years would add about $900 billion to the deficit. House Ways & Means Committee Chair Dave Camp (R-MI) and Senate Finance Committee Chair Ron Wyden (D-OR) have pledged to address these extenders, though in very different ways.
Camp would take them on one by one this year, making some permanent and killing others. Wyden (and senior panel Republican Orrin Hatch of Utah) would restore nearly all of them but only through 2015.
Clearly, as my colleague Howard Gleckman suggests, we need to rigorously examine the merits of each one. But after paring out those we don’t want, should we make the rest permanent as Camp and many lawyers and accountants favor? Or should we keep them on temporarily?
Making them permanent would reduce complexity and uncertainty. But keeping them temporary would allow Congress to regularly review them on their merits. I believe that, with a few exceptions, most should not be made permanent. However, I’d extend most of them for a more than a year at a time according to the purpose they are meant to serve.
Why not make them permanent? As Professor George Yin of the University of Virginia School of Law has argued, most of these provisions really look more like spending than taxes. We must distinguish, therefore, between those items that legitimately adjust the income tax base, and those that, like direct expenditures, subsidize particular activities or persons, or respond to a temporary need.
In my forthcoming book, Dead Men Ruling, I lay out the many complications that arise when elected officials make too many subsidies permanent. Over many decades, lawmakers have effectively destroyed the very flexibility government needs to adapt to new needs and demands over time. Making the extenders permanent would tie even tighter the fiscal straightjacket we have placed on ourselves.
Fiscal reform demands retrenchment, not expansion, of the extraordinary power of permanent programs to drive up our debt and override the ability of today’s and tomorrow’s voters to make their own political choices.
Now onto a more complicated but related issue. The way Congress handles tax subsidies such as extenders should be treated similarly to the way it handles direct spending subsidies. But doing this requires addressing some tricky budget accounting problems.
Direct expenditures can be divided into two categories: mandatory spending, often called entitlements, and discretionary spending. Discretionary spending, in turn, has multiyear and single-year spending programs. Both must be appropriated occasionally. To simplify, let’s call permanent tax subsidies “tax entitlements” and tax extenders “tax appropriations.”
The Congressional Budget Office (CBO) treats direct entitlements and tax entitlements similarly, projecting them perpetually into the future. If legislation enacted decades ago requires those entitlements to grow, CBO will treat that growth as part of the baseline of what the public is promised by “current law.”
But CBO does not treat direct appropriations and tax appropriations similarly. It assumes that direct appropriations will be extended either according to the program rules in effect (as in the case of most multi-year appropriations) or in aggregate (as in the case of most annual expenditures). In contrast, CBO assumes that tax extenders or tax appropriations expire at the end of each year. Continuing temporary tax extenders would be scored as adding significantly to the deficit, whereas extending many or most appropriations at current levels would not.
These inconsistent budget accounting rules mean we need to rethink how Congress treats temporary tax subsidies. If they are not going to be made into permanent tax entitlements, then, as far as practical, they should be treated closer to multiyear or annual tax appropriations. Multiyear often makes more sense for planning purposes. Of course, subsidies that are truly meant to be temporary, such as anti-recession relief, should be treated as if they end at a fixed date. The net result would be that when most “tax appropriations” other than those clearly meant to be temporary meet the end of some arbitrary extension period, CBO would no longer project their future costs at zero.
However one slices it, Congress needs to avoid making permanent or converting into entitlements even more subsidy programs, whether hidden in the tax code or not. At the same time, it must address its inconsistent budget accounting rules for direct appropriations and those extenders that are really little more than appropriations made by the tax-writing committees.
Nothing better exemplifies our gridlock over the future of 21st century government, as well as how to recover from the Great Recession, than the false dichotomy of austerity versus stimulus.
The austerity thesis, reduced to its simplest form, suggests that government has been living beyond its means for some time, only exacerbated by the actions that accompanied the recent economic downturn. Sequesters, tax increases, and spending cuts become the order of the day.
The stimulus hypothesis, reduced also to simplest form, suggests that more government spending and lower taxes puts money in people’s pockets and helps cure a country’s economic doldrums. Once the economy is doing better, government spending will naturally fall and taxes rise.
The debate then plays out largely over deficits: do you want larger or smaller ones?
But reduced to this form, the debate is a fallacy, for several reasons.
First, one must define larger or smaller relative to something. Last year’s spending or taxes or deficits? What’s scheduled automatically in the law? The public debate often glosses over these issues. Which is more expansionary when keeping taxes at the same level: an economy whose growth in spending is cut from 6 to 4 percent or one whose growth is increased from 1 to 3 percent?
Second, a country’s ability to run deficits depends on its level of debt. A recent debate over whether at some point higher debt starts to slow economic growth doesn’t change the fact that lenders want to be repaid. People won’t loan to Greece now, but they still find the U.S. Treasury securities a safe haven for their money.
Third, and by far the most important, what timeframe is involved? Is the Congressional Budget Office pro-austerity or pro-stimulus when it concludes that sequestration hurts the economy in the short run, but is better in the long run than doing nothing about deficits? No one on either side suggests that debt can grow forever faster than the economy. Everyone implicitly or explicitly believes that to accommodate recessions when debt grows faster there are times when debt must grow slower.
So where’s the rub? Here you must understand the emotional systems, usually veiled, that lie behind those on both sides trying to force the problem to an either/or solution.
Start with hardline austerity advocates. Many of them don’t just want smaller deficits. They want smaller government—or, at the very least, they want to prevent the government from taking ever larger shares of the economy, even given changing demographics. Essentially, austerity advocates don’t trust their pro-stimulus adversaries, some of whom can almost always find an economy going into a recession, in a recession, coming out of a recession, or attaining a lower-than-average growth rate and, therefore, needing some form of stimulus. Austerity advocates have learned from long experience that once government spending is increased, it’s hard to reduce. So they feel they have to get what deficit reduction they can now that the public’s attention to recent large debt accumulations is creating pressure to act.
Now for many the hardline stimulus advocates, their support for additional temporary government intervention cannot be entirely disentangled from their sympathy for a larger future government. Else why not agree to cut back now on the scheduled acceleration of entitlement programs, particularly fast-growing health and retirement programs? That would bring the long-run budget, at least as currently scheduled, back toward balance. It would simultaneously please many of their austerity opponents and allow for more current stimulus.
The hidden agendas are complicated further by inconsistencies on both sides. Many hardline austerity advocates, at least in the United States, don’t want cuts to apply to defense spending. For their part, many hardline stimulus advocates would be glad to pare growth in tax subsidies.
Regardless, the dichotomy falls apart once one realizes that a solution can involve a slowdown in scheduled growth rates in spending and a higher rate of growth of taxes, accompanied by less short-run deficit reduction and an abandonment of poorly targeted mechanisms such as sequesters.
Consider the buildup of debt during World War II, the last time we saw U.S. levels above where they are today. Debt-to-GDP fell fairly rapidly after the war all the way until the mid-1970s. While the growing economy certainly helped, tax rates that were raised substantially during the war were largely maintained afterward, and spending had essentially no built-in growth (actually huge declines when the troops came home). Just the opposite holds now even with recovery: there are limited tax increases to pay for past accumulations of debt or wartime spending, and spending is scheduled to grow long-term, even after temporary recession-led spending and defense spending on Afghanistan declines.
Both sides—pro-austerity and pro-stimulus—want desperately to control an unknown future, either by not paying our current bills with adequate taxes or by maintaining built-in growth rates in various programs, mainly in health and retirement. The false dichotomy between austerity versus stimulus has fallen by the wayside, and what we see through the veil are two sides in mutual embrace trying to control our future, whatever the cost to the present.
“We must act, knowing that our work will be imperfect,” Barack Obama proclaimed in his second inaugural address. Interestingly, the Washington Post blazoned its front page with the first three words without noting the succeeding dependent clause. Yet within this clause, I believe, lies the means by which the president—and Congress—and we—can move past so many of our conflicts and face up to the problems that confront us. The solution lies not in acting, but in recognizing the imperfection of what we do. If our budgets are to be vehicles for change, then we cannot enact so many laws as if the priorities of one time and place must endure forever.
More than ever before, our recent fights carry with them the implication that victory must be complete and total, setting in stone the institutions that will rule over our successors for decades and centuries to come. “We must act,” each political party seems to say, “as if our work will be perfect, else our opponents may someday slow down or even reverse our course.” Permanent monuments must be made to some liberal or conservative agenda, regardless of whether that monument rests upon unstable ground, employs an architecture glued together from incongruous designs, or fails to leave room for the improvements that only future knowledge may reveal.
Today, if we favor Social Security, it must be maintained permanently in its ancient design. For all generations of ever-expanding life expectancies, we must allow beneficiaries to retire as early as 65, or, when feeling temporarily richer, at 62. We must even accept its 1940s stereotype of the two-parent family, with abandoned mothers required to pay taxes to support spousal benefits for which they are ineligible. Similarly, if we favor less government, we can’t just work toward that goal by reducing spending. No, we have to create permanent tax cuts even if that means running economically disastrous deficits.
If we favor helping the poor, then we can never give up support for benefits like SNAP or food stamps. These programs must be etched in the law as superior to any alternative use of those funds, including ones that might provide better opportunities to people in need. If we subsidize an industry, whether oil or alternative fuel or agriculture or manufacturing, then we must enshrine that subsidy in the tax code.
Now, of course, there’s good reason for using legislation to try to provide some certainty or security. With perfect foreknowledge, we can plan for the future. But what if that future remains uncertain? Planning for it then requires creating a way to respond to its surprises, good and bad.
Unfortunately, we’ve gone long past the point where our federal budget could be flexible. A fiscal democracy index I developed with Tim Roeper shows that the combination of entitlement growth and low revenues means that today most revenues are already committed to permanent spending programs. Almost every congressional decision to adjust national priorities has to be paid for out of a deficit, or by overturning some past “permanent” enactment.
Earlier, before entitlements became so prevalent and dominant, spending was largely discretionary. Congress also felt that we should pay our bills on time, so it didn’t finance tax cuts for today’s generations by passing those liabilities onto future generations. Though many programs survived for decades, most still had to receive new votes of support. Even more important, almost none had any built-in growth. That made it easy to let some ideas languish as others came into prominence, leaving room for new choices or reconsideration over time.
Compromise is much easier when one side or the other isn’t forced into reneging on past promises to the public. It’s easier when it’s possible down the road to proceed on the same course, pursue the same objective via a different course, or decide on both a new objective and course. It’s easier when we’re not asking our opponents to keep funding some permanent monument we want erected to ourselves.
“But we have always understood that when times change, so must we; that fidelity to our founding principles requires new responses to new challenges…We understand that outworn programs are inadequate to the needs of our time…Let us answer the call of history, and carry into an uncertain future that precious light of freedom.” (Barack Obama, January 21, 2013; emphasis mine).
On January 3, 2013, the 113th session of the U.S. Congress opened with a fiscal cliff averted, but a country still stuck in a less-recognized fiscal bind.
In the first video of a three-part series, I explore one of the major reasons recent Congresses have been so dysfunctional: all, or almost all, the revenue to be collected by the Treasury Department was spent before lawmakers walked in the door.
I further discuss how spending and tax subsidy programs on autopilot, along with a tax system inadequate to pay our bills and rife with gaping holes, handicap lawmakers’ and the public’s ability to set new goals for solving today’s and tomorrow’s problems.
The Urban Institute recently released Kids’ Share 2012: Report on Federal Expenditures on Children through 2011, by Julia Isaacs, Katherine Toran, Heather Hahn, Karina Fortuny, and myself. It looks comprehensively at trends in federal spending and tax expenditures on children over the past 50 years. This sixth annual report is well worth a look if you are at all interested in how children fare in the federal budget.
In 2011, federal outlays on children fell by $2 billion, dropping from $378 billion in 2010 to $376 billion in 2011. This is the first time spending on children has fallen since the early 1980s.
However, children’s share of the spending has gone up and down over the last fifty years. Federal budget outlays on children as a percent of the domestic budget have declined from 20 percent in 1960 to 15 percent in 2011. Spending on children has not kept pace with growth in government spending over the last fifty years.
In the future, spending on children is expected to further decline, driven by budget pressures, which are strongest on the very types of programs on which kids rely: domestic discretionary programs like education that, unlike entitlements, do not grow automatically but require congressional funding each year. From 2011 to 2022, federal outlays are projected to grow by almost $1 trillion, but children gain almost nothing from this growth. In comparison, the nonchild portions of Social Security, Medicare, and Medicaid are projected to claim 91 percent of the increase.
As a result, children’s spending is projected to fall sharply as a share of the economy, from 2.5 percent of GDP in 2011 to 1.9 percent in 2022, below pre-recession levels. In 2017, Washington will start spending more on interest payments than on children.
Future decreased investment in children can be compared to increased investment on seniors. Their starting points are also different: in per-person terms in 2008, the federal government spent $3,822 on children and $26,355 on the elderly (in 2011 dollars). Take into account state and local spending, and a child on average still only gets about 45 percent as much as an elderly person.
The decrease in emphasis on children is part of a broader worrying trend that increasingly crimps investment, budgetary flexibility, and choices for the future.
This chart provides an update on percent of federal revenue available for discretionary spending over time.
Eugene Steuerle and his colleague, Tim Roeper, have developed a “fiscal democracy index” to document the fall in the fiscal freedom of our policymakers in recent years and into the future. To calculate the index, Steuerle and Roeper measured the extent to which past and future projected revenues are already claimed by the permanent programs already in place (including interest payments on the debt). The fiscal democracy index is neutral politically, favoring neither a liberal or conservative agenda, in the sense that it falls with both rising commitments from the past and reduced revenues. It fell into negative territory for the first time in history in 2009 – meaning that revenues were already falling short of the built-in spending of permanent programs – and it will return to negative territory soon if Congress does not change current entitlement and tax policies. Even reducing annual non-entitlement spending to zero – thus, ending education, transportation, housing, defense, and most other general government programs – will do little to alter the downward path of the index other than reduce some interest costs temporarily. That means that future generations will have no additional revenues to finance their own new priorities, and they will actually have to raise new revenues or cut other spending just to finance the expected growth in existing programs.
Fiscal democracy will be a central concept of Gene’s forthcoming book with Larry Haas.
Today’s budget problems aren’t America’s first. High debt levels accompanied our major wars, but they were quickly reduced soon after. “Deficits as far as the eye can see” in the mid-1980s were followed briefly by surpluses in the late 1990s. In all these cases, economic growth helped solve the problem. Today, that’s no longer possible.
Failure to understand the causes of today’s historic impasse will stymie those budget reformers tempted to believe we can use the traditional pro-growth strategy to get our fiscal house in order. Most of history is on their side: in almost all past U.S. budgets—indeed, the budgets of most nations—revenues were scheduled to grow automatically along with the economy, and expenditures were scheduled to grow only if there was new legislation. Thus, revenues in some future year would always exceed that past expense, no matter how high any current deficit. But under the laws now dominating the budget, expenditures essentially are or will be growing faster than both revenues and the rest of the economy. In fact, we’re now locked into automatic expenditure hikes that will outstrip revenues under almost any conceivable rate of economic growth.
In the many budget policy reform discussions I’ve been part of, this disconnect from the past blocks understanding of our present fiscal situation. Thus, both liberals who want to maintain spending programs and conservatives seeking to keep taxes low seem to think—or, at least, want to think—that economic growth can once again solve our problems.
Just what is different now? Today, we are facing two fiscal problems, while before we had just one. In the past, fiscal imbalance was mainly a temporary, current issue only. Yes, Congresses would occasionally spend much more than they collected in taxes, sometimes heedlessly. But as long as revenues over time rose with economic growth and most spending was discretionary, push never came to shove as long as the next Congresses weren’t too profligate
In effect, during the nation’s first two centuries, all that was required to get the nation’s house in order was for future Congresses to limit new spending increases or tax cuts. Since future surpluses were always built into the established law at any one point in time, sound fiscal policy meant not turning those surpluses into unmanageably high deficits year after year.
Take the case of World War II, when our national debt ballooned. It’s usually cited as the great example of successful fiscal policy overcoming a depression. If in 1942 Congress had developed ten-year estimates of the deficit under “current law” on the books, the estimates would have shown massive surpluses. Spending was scheduled to drop dramatically in absolute terms and as a percentage of the economy or GDP once the war was over. Meanwhile, higher tax rates imposed to support war spending would stay in place until future Congresses saw fit to reduce them.
Jump ahead to today. Now, so much spending growth is built into law in permanent or mandatory programs that these programs essentially absorb all future revenues. Meanwhile, we’ve also cut taxes—widening the gap between available revenues and growing spending levels.
But why won’t even higher economic growth solve the problem? If spending growth were limited so it couldn’t exceed some fixed rate, then higher economic growth might increase the revenue growth rate enough to help restore balance. Unfortunately, spending growth is not set at a fixed rate. Instead, it generally is scheduled to grow faster when the economy grows faster.
Consider government retirement programs, such as Social Security. Most are wage indexed insofar as a 10 percent higher growth rate of wages doesn’t just raise taxes on those wages, it also raises the annual benefits of all future retirees by 10 percent. The same doesn’t hold for discretionary programs such as education, even though we might expect that teachers’ salaries would need to rise with economic growth. Instead, teachers’ raises must be appropriated every year. Meanwhile, in most retirement systems employees stop working at fixed ages, even though for decades Americans have been living longer. When spending rises with both wages and extra years of retirement benefits, extra economic growth just doesn’t provide much if any reprieve from fiscal imbalances.
Health care is a bit more complicated. Health costs tend to rise more than proportionately with incomes. If our incomes rise by 10 percent over the next few years, we tend to demand at least 10 percent more health care. With 20 percent income growth, we want even more than 20 percent increases in health goods and services. Of course, it’s not just a demand phenomenon. The higher economic growth may reflect improvements in health technology, along with its higher costs.
Today, so much of government spending is devoted to health and retirement programs that their growing costs tend to swamp gains we might achieve in holding down the ever-smaller portion of the budget devoted to discretionary spending. Some other programs add to the problem, since they, too, tend to grow with the economy: mortgage interest deductions as we demand more housing, subsidized pension contributions and other employee benefits as our wages go up.
Built-in automatic spending growth like I’ve just described means that balancing the budget today is far harder than simply putting the brakes on new tax cuts and spending increases. A do-little Congress can no longer save the day. Our elected officials are in a bind they hate: they must both say “No” to many new give-aways AND go back on unkeepable spending and tax promises made by past lawmakers…
The thumbnail version: seek economic growth, but don’t expect it to provide the budget slack it did when most spending was discretionary. Congress has already spent the revenues that economic growth will provide, so we need to weed our government’s garden as well as water it.
From Deficit to Surplus: How Budget Projections Used to Look under Current Law
How Budget Projections Look Today under Current Law: With and Without Additional Economic Growth