StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



You Want To Cut The Deficit? Here's How.

01 Jun 2010
Posted by Stan Collender

My column from today's Roll Call says something seldom said in mixed company about reducing the deficit: whether it's tax breaks or spending programs, the federal government is going to have to stop doing something...or things.

The Not-So-Secret Truth About Deficit Cutting

June 1, 2010


Forget everything you’ve heard about how hard it is to cut the federal deficit. Once you disregard the partisan rhetoric and put aside the election-year demagoguery, you rapidly come to a conclusion that is seldom stated as directly as this: The federal government is going to have to stop doing some of the things it’s currently doing.

This applies to tax breaks as well as spending programs. In much the same way that what the government does through spending will have to come under a great deal of scrutiny, much of what Washington does through the tax code will also have to be seriously — and perhaps harshly — reappraised.

With the notable exception of the $700 billion stimulus bill adopted last year, almost everything the federal government does on both the spending and tax sides of the budget in one way or another is an ongoing effort. Very few programs and provisions are put in place with planned sunsets; the assumption is that they will continue.

President Jimmy Carter learned this the hard way when he tried and failed to get the federal government to implement “zero-based” budgeting. ZBB was a very popular concept in the corporate world in the late 1970s, and Carter thought it should be applied to the federal budget. But the president quickly discovered that it was impossible to objectively rank spending programs according to their priority. Even if you could, trying to get the government to do the equivalent of what ZBB corporations were doing — deciding that those programs that fell below the line wouldn’t be funded — turned out to be practically impossible and politically naive. ZBB quickly died and has seldom been mentioned in polite conversation in the federal budgeting community since then.

The fact that most of what’s in the federal budget is ongoing in one way or another makes the usual division between “mandatory” and “discretionary” spending quaint and largely beside the point. The truth is that one way or another there’s at least an expectation that almost all spending and taxing provisions will continue even if there’s a legal requirement that they be re-approved.

Mandatory programs are the most obvious because they are specifically created to be ongoing. Although they can be changed any time Congress and the White House want, current law remains in place unless and until that happens.

Interest on the debt is a special category of mandatory spending. Unlike benefit programs, what the government spends on interest depends solely on borrowing that has already occurred. Although there may be a way to reduce federal interest payments legislatively, doing that would likely cost the government more than it would otherwise have spent on future interest payments because investors will demand higher rates to compensate for the increase in risk that the government will again unilaterally change the terms of the bill, note or bond.

Even though it has to be funded annually, much of the remaining approximately one-third of federal spending should also be considered ongoing. For example, the Justice Department, federal jails and federal courts may require a yearly appropriation, but that doesn’t mean those funds are truly discretionary. The same is true of almost all Pentagon spending that isn’t related to a war or similar military activity.

The U.S. tax code is like mandatory spending because most of the provisions continue unchanged until Congress and the president decide differently. And, as last week’s version of the annual extenders debate clearly demonstrates, even tax programs that have a sunset provision typically are expected to remain in place. If you have any doubt, just remember that the tax extenders debate, which since the start of the year was as likely to take place as anything in politics can be, was about extending expiring provisions.

The key point is that, with the exception of the handful of tax and spending programs that are openly intended to be one-time efforts such as the Troubled Asset Relief Program, the stimulus bill and, even though they have been continuing for multiple years, activities in Iraq and Afghanistan, the baseline deficit from all ongoing initiatives is what’s critical. Although estimates vary, that’s about $1 trillion.

The short-term goal the White House has asked the president’s budget commission to reach is to come up with a plan to get the primary deficit (not counting interest on the debt) to around $500 billion by the end of fiscal 2015. Depending on the level of economic growth, that implies that the federal government will have to stop doing between $250 billion and $300 billion worth of things.

From a bottom-line perspective, it will make no difference if the government stops an existing tax break or a spending initiative. Unless additional new revenues are agreed to, the needed change will have to be for the government to stop spending something it is already spending or to forgo a tax break that is already in the books under current law.

BS. The deficit is

BS.

The deficit is overwhelming endogenous. That is to say: the main driver for the federal deficit is the dynamics of the economy, and specifically the demand by the private and foreign sectors for dollar assets.

Government deficit = non-government surplus. It's simple accounting, and yet very few seem to be able to grasp the logic. If the U.S. is running a trade deficit (foreigners accumulating dollar assets), and the domestic private sector wishes to net save, the government MUST run a deficit. All of those sectors added together must add to zero, by identity.

When there is an increase in the desire for the non-governement sector for dollar assets, one way or another the deficit will increase - either the "fast, nice" way, through tax cuts and proactive spending increases, or the "slow, painful" way, through recession-induced falling tax revenues and increased transfer payments.

Long experience has shown that attempts to "balance the budget" through tax increases and spending cuts not only create economic misery - but they also end up INCREASING the deficit, which is the "problem" (not really a problem for a soveriegn currency issuer) they were supposed to solve.


Poppycock

Both George I and Clinton brought deficits under control through a combination of tax increases and cuts in expected future spending rates (not actual cuts, of course). Even Saint Ronald put Social Security on track by (wow, what a surprise) raising taxes and deferring retirements for a couple of years. What part of this is too hard for you?

To assert that the effects of the overall economy can, at times, overwhelm the effect of a change in rates or spending does not negate the existence of deficits nor of the notion that we're consistently promising to spend more than we're willing to take in in taxes. We can, and should, stop it.


The Not-So-Secret Truth About Deficit Cutting

Actually, the "not-so-secret truth about deficit cutting" has never really been not so secret. Unfortunately, our culture's inability -- which is much more than unwillingness -- to think in the long term is at the heart of this pathological denial. Remember Dick Darman's preaching on "Now-Nowism."

Various Administrations and Congresses have spent more time dealing with the peripheries and not the essences of large issues. I used to argue that, if we are going to dismantle Rome, we have to do it boulder by boulder rather than pebble by pebble. You can work all day moving pebbles, but when the sun sets, you have little to show for your efforts (other than the appearance of effort).

Of course, the ancients may have moved boulders and large stones to build their cities, temples and pyramids, but they also understood an essential element of systems thinking: Namely, use the least amount of leverage necessary to achieve the desired result. Therefore, small, but fundamental, corrections today can yield large and significant results down the road.

Oh, well, enough said. Back to the rock pile!


I kept expecting some solutions.

Like so much of current deficit hysteria, this just states the obvious without proposing any solutions. A shorter version would seem to be "spend less or raise taxes."

The other alternative is to do things more efficiently. If we spent the same amount on health care as France (arguably best health care system in the world) we would save $900 billion a year with little downside. We could balance the budget by removing the extremely expensive private insurance system that is draining off hundreds of billions of dollars in health care spending for no good purpose.


I Agree

I click on this article to see a list of possible proposals. When he starting talking about getting rid of tax breaks, I hoped to read about some and the actual impact that cutting them would have had.

More details, please.


Programs should be authorized

Programs should be authorized for a number of years with a steadily increasing number of votes to keep them in force. This way bad programs can be easily dismembered and good ones affirmed. Even those affirmed will signal to the beneficiaries how precarious a program is and thus how close to being cancelled. For example, if the home interest deduction in the tax code needs 80 votes to continue and gets 81 in the senate, prospective homeowners need to redo their assumptions about ownership tax breaks.

Program goals and metrics would also be nice so that a failed program does not mean the desire to accomplish something is not worthy any longer; it would just mean the current approach is not working. Otherwise messages get mixed.


How About We Start by Passing a Budget!

There are lots of ways to that you could go about reducing the deficit, but the first step would undoubtedly be passing a budget. Congress was supposed to pass a budget by April 15. A few weeks ago we found out that they are not going to pass one this year. Instead they will resort to an unofficial procedure known as deeming, in which they will tack spending/budgeting onto other bills. My friends on the hill say this is not a big deal and it's been done in the past (only the 5th time this has happened). I disagree. How can you reduce deficits without laying a blueprint. Furthermore these deeming resolutions are not open to a public debate on spending.

In the end if you hope to begin to pay down the debt you will need to deal with our two largest entitlement programs, Social Security and Medicare. Also we'll need to address the since of entitlement Americans have begun to have for programs they did not pay for. Hello, Medicare part D! Young American better begin to stand up otherwise they'll be left holding the tab.




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