Elgin: Topic 2 Reply 1 (The Budget)

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The Question

While Watts and I both seem dissatisfied with the current budget process, I found his suggestions at best unrealistic. He suggests that budgets be done “several years in advance.”  Of course one of the current problems is that the Democrats in the Senate have, in violation of the law, refused to even do a budget in nearly 4 years. The President submits budgets that are late and so unrealistic that some have not gotten a single vote even from members of his own party.

Currently budgets are done for 10 years. This actually is one of the problems for it allows all kinds of games to be played. While taxes, either cuts or increases, seem to start in the current budget year, “cuts” are almost always in “the out years.” As such these cuts can function as offsets to balance out other changes over the 10 year budget cycle.  The problems is that while this may all looks good on  paper, the cuts often never happen, because the current Congress cannot bind future Congresses.

For example, On Jan 1 this year both the House and the Senate passed a law preventing a 26% cut in the payments for Medicare, and a 2% cut in Medicare payments to doctors.  Why such bi-partisan action?  Because there is no way politicians in either party are going to let such cuts happen. But if this is true, why were these cuts in the law to begin with so that they needed to be overridden?

The answer is that these “cuts” were part of the Balanced Budget Act of 1997. They were supposed to cap spending to a “Sustainable Growth Rate” each year. But each year when the caps are about to take place, Congress votes to override them.  But note that Congress does not vote to overturn the law, just that year’s cuts.  This is because they need the “cuts” in the out years, or the budget would seem even more out of balance then all the games they play make it appear.  This is part of the issue with the unfunded liabilities mentioned in my initial answer and why the games they are playing cannot go on too much longer.

But this is not the only problem.  Another problem is that because of baseline budgeting these projections in future years are taken as the starting place. Thus if a program is projected to get a 10% increase in a future year, but when that year come it only gets a 5% increase, there will be wailing and gnashing of teeth over the “massive cuts.”   It is because of games such as these that even after the sequester, with all of its massive “cuts,” ultimately the Federal government will still be spending $15 billion more than last year.

About the only place this is not true is with defense spending, for the defense department seems to be the only branch of the federal branch that actually has any cuts as opposed to reductions in the rate of increase.  According to the President’s budget, over the last several years the Defense department’s small increases have not kept up with inflation, and starting this year will see real reductions.  Even before the sequester, defense spending will go from $716B in 2012 to $701B in 2013 and down to $587B in 2017. When adjusted for inflation (using 2005 as the base) this becomes $610B in 2012 to $587B in 2013 and down to $460B in 2017.

Now one could argue that this will be like the Medicare “cuts” and be repealed every year.  However, history, both long and short term, argues against this. When adjusted for inflation, defense spending peaked in 2010, and has been decreasing since. In addition the 1990s were a period of decline which saw defense spending go from $303B in 1989 down to $268B ten years later ($481B  to $346B in Constant dollars).

What makes this worse is that the Defense department is not like a doctor. If for some reason Congress did not rescind the cuts, a doctor could just stop seeing Medicare patients when that happened. The defense department, however, must and does plan over many years.  For example, building a new fighter or a carriers is a many year process. If the money is not in the budget, it cannot be done.

Consider the Navy for example, The Quadrennial Defense Review said that we should have 346 ships to do the mission the nation has given the Navy. The Navy, realizing the situation, said they could get by with 313, which has recently been reduced yet again to 300. Yet we only have about 287 and we look headed to 250. As Robert Kaplan put it, “There is a big difference between a 346-ship US navy and a 250-ship navy – the difference between one kind of world order and another.”

To make matters even worse, because of recent cut backs the Navy does not even have enough money to run the ships that it has.  Thus, for example, it is keeping the USS Harry S. Truman in dock instead of sending it to the Persian Gulf.  All branches are cutting back on training and one thing is clear from history, less training means more lives lost when the military is needed.  So while I agree with Watts that “First, [the budget] must focus on defense” that is hardly what the Democrats do, and sadly a growing number of Republicans as well.

Watts suggestion that tax rates be “set at relatively high levels” so that “Congress will have to act.”  But it is far from clear why they would have to act, other than that this would kill the economy.  Like an addict needing their next fix, Congress desperately needs money for they are addicted to spending. If given the promise of new monies from increased taxes, they will simply spend it. Then when the taxes depress the economy even further and the revenues do not come in, we will be in even a worse hole.

Finally, Watts argues that “welfare of the people must be included in the budget.”  I would argue that the best thing for the welfare of the people is to have a strong and vibrant economy so that the people can take care of their own welfare. As for those who cannot take care of themselves, private charity, state and local government can best take care of them.