As you no doubt have heard, the President has submitted ...



April 17, 2013 Monthly Trustee Call

Wrap-Up on the President’s Budget

Joe Minark, Senior Vice President and Director of Research

As you no doubt have heard, the President has submitted his budget for the coming fiscal year, fiscal year 2014, which begins on October 1, 2013. A president’s budget is due by law on the first Monday in February. The President said that his homework was late because the Congress was late in completing its appropriations for the ongoing fiscal year, fiscal year 2013. This complaint was true; in fact, it has been true every year for the past 20 years. Clearly, the budget process is not exactly a well oiled machine.

As usual this year, the President’s budget was met by unjustified extremes of praise and derision. Given the intensity of the derision, one might wonder how the world possibly can go on with the presence of this budget. Let’s review our terms so that we can judge the budget’s significance.

What is a “budget?” Well, a president’s budget is a book – really, a set of books. It is not written in legislative language; it cannot be “adopted.” The Congress can choose to adopt budgetary language that follows the president’s budget more or less closely. But in our presidential system of government – in contrast to the parliamentary systems around the world – no presidential proposal of any kind is adopted literally and by acclamation. The Congress wants to have its say, and will modify anything a president proposes. (The last time a president proposed what was literally a draft piece of legislative language was President Clinton’s healthcare plan. That didn’t go very well.)

You might best describe a president’s budget as a blueprint. It is quite specific about some things – most particularly and ironically about the annual appropriations that the Congress most jealously controls. In fact, the big fat telephone book that most people identify as the “budget” is solely about the President’s appropriations proposals, which it presents in agonizing detail.

The President’s budget joins the House and Senate budget resolutions, which this year, contrary to the normal pattern, were passed first. In fact, it is contrary to the new normal pattern that they were passed at all.

But as we discussed before, a budget resolution isn’t really a “budget” either, in the sense that most people understand. A budget resolution does not contain legal language. It also is like a blueprint, maybe even more of an outline, of the sum and total of all of the pieces of fiscal legislation that a Congress will pass over a year. It is all of those pieces of legislation in their totality which probably constitute what most people commonly understand a “budget” to be. We still are way short of writing and passing the legislation that we will need to make the federal government run during fiscal year 2014. And we are leagues away from making the decisions necessary to make the federal government run for the indefinite future.

So let’s take it from the top – which this year means the budget legislation in the Congress. Where do we stand, and what are the likely prospects for budget policy for the coming fiscal year?

Based on the debate on Capitol Hill, the innocent surely concluded that the recent passage of House and Senate budget resolutions will lead quickly to a committee of conference to reconcile the two resolutions into a single consensus budget outline. Well, not so fast – or more likely, not at all. There are two roadblocks.

First, the two budget resolutions have almost nothing in common. The House Republican budget resolution is a statement of the principles of that party’s ideological base. It passed without the votes of some of its party’s more moderate Members, and with no Democratic votes. The Senate Democratic budget resolution is a mirror image, in terms of both its content and its support. If a conference were to meet, the conversation likely would have all of the pleasantry of the small-talk of a really bad blind date.

But don’t count on the conference meeting at all. There is a little known provision of the rules of the House that tends to freeze conference committee action in these days of divisiveness. If a conference committee has not reported a reconciled bill by twenty days after the House conferees were appointed, the Minority has the right to make a specific motion to instruct the conferees. That motion must be debated for one hour, equally divided between the two sides, and a vote must be taken.

In practice, a motion to instruct can be one of the only shots that a Minority can get at a Majority in the House – which can be the most dictatorial legislative body imaginable, where the Majority can do almost anything it wants and the Minority is almost totally powerless. If a conference committee has been unsuccessful after 20 days, the Minority will work to craft a motion about the pending bill that will embarrass the Majority – for example, daring the Majority to vote against a popular omitted provision which would, if included, destabilize the entire bill. (For a budget resolution, such a motion might call for an unaffordable increase in spending for a popular program.)

One response would be for the Majority to try to interpret the motion as saying something that was not intended by the Minority, such that the Majority could rationalize voting for it. It is not uncommon to hear convoluted, non-factual speeches on the floor, followed by a unanimous vote for a motion to instruct. However, if a motion is written skillfully, the House Majority could find itself on the horns of a dilemma.

But there is another potential response from a House Majority, and that is simply not to appoint its conferees. If the House and the Senate are controlled by the same party, the leading Members of the Majority simply gather informally behind closed doors and work out the bill they want. The conferees are appointed after the work is finished. Then the conference holds a single formal meeting, the chairman of the conference introduces the Majority’s agreed-upon version, the chairman bangs the gavel, and the conference concludes – without taking 20 days from the appointment of conferees, even if the informal deliberations took months to conclude.

Today, however, with the House and Senate controlled by different parties, the Senate leadership cannot be expected to provide cover for the House Majority. And with little prospect of agreement between the two parties anyway, it might not be a good use of your time to search for lofty and hopeful debate over the congressional budget resolution.

So an impressionistic but usefully accurate picture of the situation in the Congress would be that there is little prospect for forward motion without a substantial change in attitude. Some might have hoped that the President’s budget would supply that change of attitude. A case can be made that the budget that we received could conceivably have met that threshold. But the holding of breath is not recommended.

As argued in last Friday’s blog, the budget makes some substantial gestures toward the other side. The most widely discussed was the proposed switch to the so-called “chained CPI” for purposes of inflation indexation of federal tax and spending programs. In the simplest terms, the chained CPI recognizes that consumers can respond to price increases for some goods and services by purchasing others whose prices have not increased. For example, in the face of increases in the price of apples, consumers might choose to purchase pears instead. The CPI now used for inflation indexation implicitly assumes that consumers will go right on buying higher-priced apples. There are technical issues, including the universes of goods and services within which consumers would shift their purchases, and the degree to which they would do so. But the general premise is unimpeachable.

Republicans in the House and the Senate had demanded that the President embrace the switch to the chained CPI as a first step toward an agreement. In fact, Senator Mitch McConnell (R-KY) said that if the President would do so, Republicans would consider revenue increases. Now, with the chained CPI duly offered, Senator McConnell, along with House Speaker John Boehner (R-OH), says that the President already got those revenue increases in the end-of-year fiscal cliff deal, and that no further revenue increases will be forthcoming. Democrats argue back that those enacted tax increases are less than Speaker Boehner offered in his 2011 budget negotiations with the President; but we will never settle the dispute over who hit whom first, and how hard. It does seem clear enough, however, that the tone in Washington has not changed.

Many congressional Democrats, predictably enough, castigated their own President for betraying their values and exposing the party to blowback from its own base. Right on cue, Rep. Greg Walden (R-OR), the chairman of the National Republican Congressional Campaign Committee, attacked President Obama for an alleged “shocking attack on seniors.” Some Republicans have criticized Rep. Walden; others have defended him.

The President may be more exposed on this issue because he has not proposed a comprehensive program to resolve the Social Security financing problem once and for all. If he had, he might have called more-effective attention to his own proposals to mitigate the effect of the chained CPI on low-income and long-lived retirees. Such limited but compensating benefit increases have been a part of all of the comprehensive bipartisan packages to address Social Security for the long term.

The President went further with proposals to achieve savings in Medicare. Those proposals do not constitute a comprehensive, market-based restructuring. They are, rather, a collection of rifle-shot adjustments that are intended to redirect incentives in particular constructive ways. As such, there is an aspect of sticking fingers in a rapidly multiplying number of holes in the dike. However, the budget identifies a large number of fingers; it claims greater budget savings in the first 10 years than does House Budget Committee Chairman Paul Ryan’s budget resolution. And the amount of the savings is growing rapidly at the end of the 10-year budget window. So the President has made a major non-systemic attack on Medicare cost growth, and in so doing he once more has earned the opprobrium of his own party in Congress. Whether this earns him any engagement with the other party in Congress remains to be seen; but so far, the Republican reaction has been dismissive.

The President’s greatest effort toward bending the health-care cost curve remains the 2010 Patient Protection and Affordable Care Act. A major concern of Democrats at this stage is that Republicans will continue to stall appropriations for the highly complex process of implementing the PPACA, while Republican governors refuse to implement the most important part of the Act, the health-insurance exchanges, at the state level. Democrats are concerned that the startup of the key components of the Act in January of 2014 will be a debacle, and that in turn the congressional elections in November of 2014 will have a similar outcome for their prospects to hold the Senate and retake the House.

On tax policy, the President continues to enunciate a call for “reform,” but his policy recommendations fall rather short of that descriptor. On the individual income tax side, the President’s most significant recommendation is limiting the value of itemized deductions and other selected tax exclusions and deductions at 28 percent of their amount, even if the taxpayer faces a marginal tax rate greater than 28 percent. That policy is basically sound, but it would need to be more aggressive (with a limit at a lower percentage, like the Bipartisan Policy Center proposal at 15 percent) and to be combined with other major tax-base-broadening steps to achieve a major reform that could both reduce the budget deficit and reduce marginal tax rates.

The President’s second, and smaller, proposal for the individual income tax is the so-called “Buffett rule,” which would amount to another alternative minimum tax (on top of the monstrosity that we already have) for “wealthy millionaires” (who are persons with incomes of over $1 million, with the tax phased in over a range up to $2 million). Tax due under the Buffett rule would equal 30 percent of their income (after a 28 percent credit for charitable contributions – in keeping with the spirit of the proposal just described). The principal effect of this Buffett rule would be to increase the marginal income tax rate on capital gains and dividends. The revenue gain from this provision is limited (a little over $5 billion per year once it is fully in place), and so its purpose appears to be largely symbolic, or possibly to serve as a bargaining chip in any budget negotiations that might occur.

On the corporate income tax side, the President enumerates a large number of proposals to broaden the tax base, but he does not include the savings in his budget’s bottom line. Rather, he earmarks those provisions to finance reduction of the corporate tax rate as part of a possible revenue-neutral corporate tax reform. This is a responsible way to proceed. However, the revenue impact of those proposals is small enough, especially when considered along with the President’s extensive list of new proposed targeted corporate tax preferences, that it does not appear likely that they will finance significant reduction of the corporate tax rate.

CED’s most recent tax reform statement said what many budget analysts have since repeated: Tax reform, with a significantly broadened base and reduced tax rates, could be a foundation stone of an important budget deal. In particular, lower marginal income tax rates could help Republicans to swallow increased tax revenues; and those increased tax revenues could in turn help Democrats to swallow structural reform in Medicare. But so far, no policy actor has shown any signs of having read the script. And piecemeal tax changes merely finger losers who must give up their tax preferences, without any winners or even any partial compensation for the losers through the lower tax rates. Full-scale reform is hard, but half-posteriored reform might prove to be not much easier.

This quick tour of the President’s budget leaves us at everyone’s last stop, which is discretionary spending – the annual appropriations that fund the Department of Defense and all of the civilian government agencies. As I have explained before, the easiest way to save money in future budget years is to assume to do so – simply by writing a smaller number for future annual appropriations. No one will know what appropriations bills will cost 10 years from now until 10 years from now. Just about every budget writer uses assumed future appropriations cuts to squeeze a size two trillion foot into a size one trillion shoe, and that is what the President has done.

The budget proposes defense appropriations for 2017 that will be the lowest size on record, expressed as a percentage of the GDP. Then the budget proceeds from that record-low base to cut even further, until spending in 2023, so measured, is lower than that by 20 percent. The cut in non-defense appropriations fits exactly the same description, except that the cut from 2017 to 2023 is more like one-fourth.

One can make a strong case that the federal government, like any other organization, is sufficiently inefficient that it could achieve significant budgetary savings without significant performance consequences through process improvement. However, the numbers in the President’s budget go well beyond any reasonable benchmark for typical organizational efficiencies. Rather, these proposed cuts, like those in the House budget resolution, go beyond the clearly attainable, beyond the ambitious, even beyond the adventurous, to the purely speculative – or as the animated children’s film character puts it: “To infinity, and beyond.”

In the last years of the Clinton Administration, then Office of Management Director (now Treasury Secretary) Jack Lew used to explain to the few who would listen that while attainable appropriations caps encourage agencies to pursue efficiencies, unattainable appropriations caps encourage only evasion. Now, defense analysts point out that the Pentagon in recent months has done little to prepare for the new, reduced appropriations caps with the budget sequester on top. Rather, the Defense Department seems to be playing a game of chicken with the Congress, putting its own budgeting on a course where it could not possibly comply – in the hope and expectation that the Congress will relent and increase funding.

Of course, the President’s budget is not unique in assuming huge out-year savings from unlikely cuts in annual appropriations; both of the congressional budget resolutions do so as well. These extreme assumptions serve as an effective excuse to postpone or avoid fundamental reform of Social Security and the federal government’s health care programs and its tax system.

One can only wonder whether the public will decide that the sequester is a sham before the Congress capitulates and increases funding. Which takes us to our conclusion, which might be called “next steps,” or, alternatively, “next crises.” With the major expiring tax cuts either expired or made permanent, and the triggered spending cuts now triggered, we are back to the old world of only regularly scheduled train wrecks. The temporary suspension of the debt limit expires next month, and the Treasury Secretary’s “extraordinary measures” are expected to be exhausted in August, or possibly early September – at which point our collective head will be pressed against the debt ceiling again. Then, the annual appropriations run out at the end of the current fiscal year on September 30. Let’s hope for some good news during the summer instead.

But as to an ultimate solution to the lack of bipartisan cooperation on the budget problem, I have one remaining idea. In both Maryland and Virginia, there is a small town named Damascus. Pick one, and schedule a retreat of the bipartisan congressional leadership there. Have the Members travel to the retreat together by bus – and hope for a really, really big storm.

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