Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

Why “we don’t have a plan” is selfishly incompetent

Jerry Stratton, February 25, 2012

At the congressional budget hearings several days ago, Timothy Geithner was confronted with the Congressional Budget Office’s numbers showing the economy shutting down in 2027. Why, asked Congressman Paul Ryan, does the President’s budget continue the path towards a dead economy? Geithner’s response was:

You are right to say we’re not coming before you today to say ‘we have a definitive solution to that long term problem.’ What we do know is, we don’t like yours.

The White House’s plan—and the Democratic Senate’s—is to ignore the problem, continue spending heavily, and then deal with it when the collapse hits. But that won’t work, because nature does not like that kind of hubris. Deliberately waiting until the last minute invites nature’s wrath. This is not a time-bomb with a visible clock. It’s an invisible, random trigger that, once flipped, will crash the economy. We can’t wait until midnight on December 31, 2026, and start fixing it then.

The analogy people have been using is that once the car drives over the cliff, you can’t turn it around. I’d say it’s more likely hanging from a fraying rope on a circus ride: once the rope snaps, it’s too late to strengthen it. The Democratic plan is to wait until after the rope frays, wait until after the rope snaps, and then start fixing the problem when we’ve dropped to within a few feet of the ground.

We can’t wait until the last minute because that’s after the rope has snapped. But we also don’t even know when the last minute is. If the CBO says 2027, that’s almost certainly the maximum amount of time we have, by the nature of how the CBO is required to work by law.

The CBO is required to perform a relatively static analysis. When the CBO analyzes a bill or proposal, the law requires them to stay within strict boundaries; they can’t use any real-world knowledge other than what is in the restrictions handed them. In one way this is good: if they were permitted wide latitude in their analyses, they would inevitably slide into using that latitude for political means. But in practice this kind of static analysis downplays risks, because risks usually come from unanticipated places. If your proposal anticipates a risk, it also mitigates it.1

Some of the “risks” involved in following our current path are less risks than invisible elephants. Spending always increases above the baseline. Politicians don’t cut programs, they increase them and add more. Whatever spending is in the White House’s budget proposal is the minimum spending we’ll actually see.

We already see people like Paul Krugman2 at the New York Times calling for yet another crony aid bill like the trillion-dollar crony stimulus package of 2009. Their argument is that the 2009 spending failed because a trillion dollars wasn’t enough borrowing. Politicians are likely to be very receptive to borrowing more money as a “solution” to the debt problem.

But there are more problems to waiting than just the inevitability of politicians spending like politicians. The United States is in a very unique position that has sheltered us from the worst effects of the current recession. Despite the high unemployment and inflation that we’re experiencing, we’re still better off than the rest of the world. But there are several thresholds that, once crossed, drastically reduce the value of our economy and our dollar.

Interest on our debt is extremely low. Most of our debt is in short-term loans that have to be rolled over every three years. When interest rates rise, our interest payments will skyrocket.

One of the many problems with debt as high as we currently have is that inflation doesn’t help. Normally, if you’re in debt the value of your debt drops as inflation rises. But that only holds when you don’t have to borrow to make your monthly payments and other outlays. With short-term rollovers, the fact that we’re still spending more than we have, and the high amounts of debt we currently have, that’s not true for us. We’re continually borrowing more to meet our current spending. Higher inflation will just increase that because the monthly payments on the debt will increase.

The United States dollar is the default for world trade. But we’re coasting on our laurels because everyone else has even worse fiscal policy than we do. The Euro could dominate world trade, if they jumped off of the bailout train and really reigned in spending. I’ll bet Britain could, too, and their citizens are probably more open to such rhetoric than the heads of the various countries of the European Monetary Union. Germany almost certainly could, if they pulled out of the Euro.

Once the dollar has a real competitor in the world economy, the dollar will be less desirable. “Less desirable” means it will be worth less. Remember that modern money has no intrinsic worth other than the paper it’s printed on. We can continue pretending it is worth something only to the extent that other people also pretend that it is worth something. The dollar is worth a lot in modern finance because everyone in the world is willing to pretend it is worth something. The fewer people do that, the less it really is worth.

Solutions

There are solutions. First, we should move from budgets that assume spending always increases and that treat smaller increases as if they were cuts (as the current federal budget process literally does3), and move to zero-based budgeting. Every year, the budget should start at zero; programs should be added to it until planned spending reaches the amount of money we have to spend. Then we stop adding programs. If we need some program that isn’t in budget after we exceed the available budget, we need to cut a program that is in the budget to make room. That’s what a budget is supposed to be.

That covers important solutions two and three as well: balance all budgets and stop assuming that every program must increase in size year-over-year.

Second, we need to convert all defined benefit programs into defined contribution programs where the contributor owns the payment. Social security, for example, is killing our economy because the contributions are disconnected from the payments, and the contributions sit there tempting politicians into using them for this year’s programs instead of saving them for when they’ll be needed. Alternately, if we can’t handle defined contribution with ownership by the contributor, we need to acknowledge that this year’s benefits come out of this year’s taxes. And the total benefits must not exceed the taxes allotted to it this year.

We can’t have it both ways: we can’t promise benefits tomorrow and spend the money backing those promises today.

The House Budget Committee’s ten-bill reform package, offered in December, provides several solutions, most importantly:

  • The Baseline Reform Act from Representative Rob Woodall of Georgia; it “reforms the budget ‘baseline’ to remove automatic inflation increases in discretionary accounts, and to require a comparison to the previous year’s spending levels.”
  • The Government Shutdown Prevention Act from Representative James Lankford of Oklahoma. This is very important: whenever we have a spending crisis, the politicians who want to spend too much by far and the politicians who want to spend too much by only a little get into a showdown. This bill would take at least some of the brinkmanship out of the process. “If Congress fails to enact appropriations bills by the beginning of the fiscal year (Oct. 1), provides automatic authority to fund programs at a slightly reduced rate from the previous year’s level.”
  • The Review Every Dollar Act from Representative Jason Chaffetz of Utah. It’s not quite as good as zero-based budgeting, which effectively sunsets all programs every year, but it “Requires periodic sunset reviews and reauthorization of all federal programs to ensure the programs perform an appropriate role and are operating effectively.… Requires any new rule or regulation promulgated by the administration that includes new spending to be explicitly funded by Congress before such regulations take effect.”

There are other very good ideas in the ten acts, such as The Budget and Accounting Transparency Act which brings government-sponsored enterprises specifically on-budget, including the Post Office. I’m not sure how important this is compared to the others, but I wouldn’t be surprised if it gets fought the hardest, just because it will remove some opportunity for billion-dollar shell games such as is performed with the Post Office and the federal retirement fund. There’s also the The Balancing our Obligations for the Long Term Act. This would expand the CBO’s time window to beyond the ten years it is currently limited to. This statutory limit on the CBO’s estimates has resulted in bills where taxes are levied early and spending increased later, so as to push most of the spending out beyond the ten-year window, making it look like budget-busting bills are budget-neutral. It also “requires GAO and OMB to report annually on the federal government’s unfunded obligations” which is also a good idea.

While all ten of the acts look like good reforms, any combination of any two of the three acts I’ve bulleted should help us turn around our current out-of-control spending process. The process itself encourages bad behavior: it assumes that spending will always increase, so that just holding the line is headlined as a cut; it assumes that government programs never die; and it assures that a President can get bad budgets passed by threatening to default on our debts. We need this reform package.

In response to Paul Krugman’s New Cents: Money is worth only what we pretend it is worth. If we pretend it’s worth nothing, then it is worth nothing.

  1. Or at least, one would hope it does. With politicians you never know.

  2. Speaking of selfish incompetence, Paul Krugman seems to be consciously taking the mantle of a sort of charismatically-challenged Ellsworth Toohey. He knows the money isn’t there and he knows that spending it anyway will destroy the economy. But he wants to do it anyway. (I’m not the first to make this connection.)

  3. Very often, when you hear complaints about how one side or the other is “taking the axe” to some cherished program, what this really means is that someone is trying to reduce the assumed increase in spending on that program. The big brouhaha over Republicans “cutting” SCHIP several years ago wasn’t about Democrats increasing spending on SCHIP and Republicans reducing spending on it. It was merely about the level of increased spending—both Republicans and Democrats wanted to increase spending on SCHIP, but the Democrats wanted to increase it even more.

  1. <- Greek’s Revenge