Don't overthink the fiscal problem, it's not that complicated

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In our view, the government’s disgraceful fiscal track record stems from a lack of political will to prudently limit the government’s overall expenditures and spend the taxpayers’ money wisely. Consider what’s been happening re government funding for Fiscal Year 2019 (which will start on Oct. 1, just over four months from now).

On Feb. 12, the president’s budget proposal (PBP) was sent to Congress. Later that week, Budget Director Mick Mulvaney testified before the Senate (Feb. 13) and House (Feb. 14) Budget Committees. Thus, members of the committees were afforded an opportunity (five minutes each) to memorialize their reactions to the PBP by asking questions or offering comments as they saw fit. The reactions were all over the lot, and comments from Democratic members of the Senate Budget Committee were particularly scathing. Soaring deficits hard to square with fiscal responsibility,
4/23/18.

On April 9, the Congressional Budget Office issued a report to the Budget Committees. The CBO report presented a current policy baseline that ignored the policy recommendations (including numerous specific deficit reduction proposals) of the PBP and thereby increased projected deficits and debt levels to even more alarming levels. Lifting a line from SERVPRO’s television commercial, it’s as though the PBP “never even happened.”

The CBO report was supposed to set the stage for a congressional budget resolution, which would supposedly propose prudent policy adjustments to the baseline projection. No budget resolution has been proposed, however, and the word is there won’t be one. Why? Maybe the members of Congress aren’t anxious to issue a budget document – in the runup to the mid-term elections - that would either (a) call for sharp spending cuts and/or tax increases, or (b) predict major deficits over the next decade.

Even without a budget resolution, the applicable congressional committees could craft the 12 appropriations bills covering “discretionary” outlays (about 1/3 of the total budget) for FY 2019 so they could be enacted by Oct. 1. No need for a continuing resolution (or several) – to be eventually followed by a last minute, omnibus spending package such as the president has vowed he will never sign again. Sounds like a step in the right direction to us, but one that might require Republicans to unite behind a fiscal responsibility banner and “go nuclear” in the Senate to abolish the filibuster rule. Political straws in the wind, Issue A,
5/7/18.

Unlike an effort to rescind previously enacted spending authorizations [$15B has since been proposed, a mere drop in the bucket vs. projected deficits; congressional approval is considered dicey], this plan would be forward looking. If successful, Republicans could cut spending in FY 2019 and align the spending that was proposed with conservative priorities instead of waiting until after the elections when they might not be in a position to prevail.

Some members of Congress would love to speed up appropriation bills, especially legislators anxious to lock in higher defense spending levels. Defense budget rolls along as Senate committees announce markups, Jamie McIntyre & Travis J. Tritten, Washington Examiner,
5/15/18.

The Senate Appropriations Committee says it plans to hold its markup of the legislation during the last week of June. Meanwhile, the committee will take testimony from Army and Air Force leaders today and Thursday, respectively. On the other side of Capitol Hill, the House Appropriations Committee held a closed budget hearing at the end of April on its annual appropriations spending bill with testimony from Defense Secretary Jim Mattis and Joint Chiefs Chairman Gen. Joseph Dunford, indicating it may also be close to finishing its work.

The legislative bottleneck is typically in the Senate, which is also responsible for confirming presidential appointments, and some senators have urged Senate Majority Leader Mitch McConnell to cancel all or part of the August recess. One of the goals would be to get the appropriation bills done. Senate Republicans petition McConnell to work through August on confirmations, spending bills, David Sherfinski, Washington Times,
5/15/18.

Partly born of frustration with Democrats and partly worried that voters will see a lack of progress from an all-Republican Washington, the senators said voters preparing for the November elections deserve to know that the Republican Party is making maximum effort on its priorities. Sen. David Perdue, the Georgia Republican spearheading the push, said Mr. Trump appears to be on board with the call to cancel recess and that Mr. McConnell is also receptive. “All things are on the table,” Mr. Perdue said. “Just like the president tweeted over the weekend, if we don’t fund the government by Aug. 1, then we should not go home.”

Hope springs eternal, and there has been talk of a new spirit of cooperation in DC that could move appropriation bills faster without abolishing the Senate filibuster rule. Why Trump and Congress are talking about scrapping lawmakers’ August break, Ted Barrett & Ashley Killough, local10.com,
5/15/18.

• Trump tweeted over the weekend that he wants Congress to pass its annual spending legislation before the typical August recess -- or, as he wrote, "NOT GO HOME."

• 16 Republican senators signed a letter to Senate Majority Leader Mitch McConnell, urging the Kentucky Republican to cancel the summer recess so they can get more work done. "We stand ready to work Mondays and Fridays, nights as well as weekends, to ensure the funding process is not used to jam the President with a bad spending deal."

• "I'm somewhat optimistic based on the conversations I've had with the Democratic leader," McConnell told reporters Tuesday. "that we're going to have a higher level of cooperation than we've had, and we'll see how that works out." The Senate minority leader, New York Democrat Chuck Schumer, agreed, saying he didn't think senators would need to work through August to pass the bills.


Maybe, but the cooperation may evaporate if Republicans demand funding for a border wall (the president has said more than once that he’s willing to go to the mat on this issue), defunding of Planned Parenthood (an administration proposal along these lines was just announced), or targeted cuts to non-defense spending.

We’re also skeptical of the idea that major gains can be achieved by tinkering with the congressional budget rules, although we have been tracking the proceedings of the Joint Select Committee on Budget and Appropriations Process Reform in case the JSC comes up with some promising ideas. Reviewing the government’s budget process,
5/14/18.

Readers of the last entry (scroll to the end for comments) added that (1) legislators focus on maintaining/increasing their role in the overall scheme of things, not balancing the budget, and (2) as the late Milton Friedman famously observed, the real issue isn’t deficits (which citizens pay for via borrowing or inflation), it’s government spending (which diverts resources from the productive private sector).

Here’s a video of Mr. Friedman likening deficit hawks to “hand maidens of the big spenders.” Perhaps the argument is overstated, we think deficits do matter (if only because they dull public perceptions of the cost of government outlays), but it’s fun to watch a master at work! Milton Friedman
video (1:25).

Wouldn’t it be more reasonable (or realistic) to work for balanced, middle of the road solutions? No, says Friedman, because as soon as taxes are raised to cover the deficit big spenders will propose new ideas for spending the money. And here’s a bit of supporting evidence:

A. Peterson Foundation fiscal summit – On May 11, the Peterson Foundation put on a well-organized and apparently successful fiscal summit. This event commemorated the recent passing of Peter G. Peterson, the billionaire founder of the foundation and a zealous advocate of fiscal responsibility, and also spoke about the path forward. With no effort to be exhaustive, here are some noteworthy highlights.

•This was the PGPF’s 9th annual fiscal summit, and despite the generous funding of this organization there was no progress on the fiscal problem to report.

•The theme of this year’s summit wasn’t “Spending matters,” it was “Debt matters.”

•What factors are driving the fiscal problem? Retirement of the Baby Boomers, longer life spans, rising interest rates, etc. were all mentioned, but so was “insufficient revenues.” And this last point clearly wasn’t an offhand comment.

•Consider this chart of debt vs. Gross Domestic Product soaring to unprecedented levels.


Screen Shot 2018-05-19 at 8.54.01 PM

•Or this chart, which shows federal outlays growing to over 30% of GDP while federal revenues remain below 20% of GDP.


Screen Shot 2018-05-19 at 9.00.21 PM

•What was the main presentation during the lunch period (when a captive audience would be assured)? Answer: a panel presentation pitching a carbon tax.

Would a carbon tax improve our fiscal outlook? This panel brings together leading experts to explore the potential for a well-designed carbon tax to help put our nation on a more sustainable fiscal path. Key questions include how best to structure a carbon tax that is fair to Americans of all income levels as well as across sectors and industries, while boosting economic growth, discouraging the use of carbon-intense energy, and raising new revenue that can be used to address budget shortfalls.

•Three members of Congress were interviewed (individually) by Erica Werner of the Washington Post. All three acknowledged the importance of addressing the fiscal problem, but none of them seriously suggested that this problem was likely to be solved any time soon.

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Senator Jeff Flake (R-AZ), video (18:59), 5/11/18. - After 18 years in Congress, during which he became known as a fiscal conservative and leading opponent of the insertion of “earmarks” in appropriation bills, Sen. Flake will be stepping down at the end of the current session. His explanation for the growing fiscal problem: Very low interest rates have been masking a deteriorating situation, so the public has lost interest and legislators have no political incentive to take action. If the government goes over the “fiscal cliff,” as may well happen, it will be very tough to bring things back into balance.

Sen. Flake supported his vote for the tax cut bill, saying corporate tax cuts were necessary to make US business more competitive. However, he would have preferred to skip the individual tax cuts. The proposal to make the individual tax cuts permanent now would represent a meaningless “show vote,” and the rescission package applies to “money that wasn’t going to be spent anyway. He slammed the president for lack of leadership on the budget and predicted that Mr. Trump won’t make good on his threat to veto the next omnibus spending bill.

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House Minority Leader Nancy Pelosi (D-CA), video (31:38), 5/11/18. - Rep. Pelosi claimed that her party stands for fiscal responsibility, whereas Republicans do not. The secret is to pay for government programs on a current basis, thereby ensuring a balanced budget. She rattled off numerous areas in which more spending (aka investment) should be considered, while ducking questions as to the overall price tag. The principal means of deficit reduction that she mentioned was rolling back the Republican tax cut bill (or at least a large portion thereof).

Query: Are Rep. Pelosi’s remarks representative of the Democratic Party of the future? Perhaps not, but we would note that the Democratic leaders angling to be considered for the presidential nomination in 2020 have been suggesting plenty of expensive new government programs. Hey, Democrats! What’s the big idea? Dana Milbank, Washington Post, 5/15/18.

-Senator David Perdue (R-GA), video (28:41),
5/11/18. The first question for Sen. Perdue was whether he believed the government could grow its way out of the fiscal problem. No, he said, nor could the problem be solved by cutting spending or raising taxes. It was too big: $21T in current debt, some $130T in unfunded future liabilities, and it would take “a combination of things” over a period of 20-30 years to get the debt down to a reasonable level.

Sen. Perdue lauded the president for attacking the issues in a logical sequence and mentioned having been summoned to New York for a conversation months before Mr. Trump threw his hat in the ring. It was realistic to start with regulatory rollbacks and a tax cut in the interest of jump-starting growth and putting people back to work. And by the way, the CBO was wrong that the tax cut would increase the deficit because a mere 0.4% increase in the economic growth rate would recoup the gross $1.5T reduction in tax revenues.

There had been plenty of talk about other issues behind the scenes, and the president was well aware of the need to reform entitlement programs. Assuming his re-election in 2020, predicted Sen. Perdue, this subject would be addressed during his eight years in office.

Sen. Perdue voted against the omnibus spending bill, and the president had seriously considered vetoing the legislation – backing off only because of the compelling need to boost defense spending. Would he veto a CR at the end of September. That’s what he said, don’t doubt him. No wonder so many Republican senators were urging that the Senate work through the August recess to get the job done!

B. Fiscal hawk throws in the towel – A retiring US Senator was recently asked how he assessed the prospects for fixing the fiscal problem. Sen. Bob Corker responded to the effect that he had given up on the issue because the vast majority of Americans don’t care about the debt – it’s just a fact – and therefore neither Congress nor the president was going to do the necessary. Bob Corker causes a stir with blunt talk on debt: “Nobody cares,” Joseph Lawler, Washington Examiner, 5/18/18.

Unfortunately, this statement rings true. No wonder so many politicians find ways to “express concern” about the fiscal problem without ever actually doing anything to fix it.

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Summing up: The fiscal problem needs to be attacked more aggressively than it has been in recent years. and we agree with Milton Friedman that there is no chance of success without doing a much better job of controlling government spending.

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#I listened to the Milton Friedman video. It makes sense. - SAFE member (DE)

#Sent in dues check for 2018. - SAFE member (DE)

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