March of the Budget Wars

By Wayne T. Brough

(Photo of President Barack Obama and Speaker of the House John Boehner via the White House Flickr)

March should be the month of reckoning for budget wars that have ensnared Washington and bedeviled the Obama administration since its beginning. The massive federal outlays that started with TARP and continued through various stimulus efforts have pushed the limits on spending, forcing the administration to address real, and perhaps binding, budget constraints. But faced with a $1.2 trillion sequestration threat, President Obama used his State of the Union to inveigh against the across-the-board cuts of the 2011 budget deal. Calling them “sudden, harsh, and arbitrary,” the president is putting the full weight of the White House behind an effort to undo the one source of significant spending cuts to emerge from the battle over the debt ceiling.

Unfortunately, this is merely the latest chapter in Washington’s aversion to any serious discussion about spending cuts. The Senate has failed to pass a budget for almost 4 years, the debt ceiling is routinely raised, and the entitlement programs remain on autopilot. The only hint of spending reform is the sequester, but under last month’s American Taxpayer Relief Act of 2012, mandated spending cuts were pushed from January 2 to March 1, 2013. With the automatic budget cuts now only weeks away, the president’s response is a proposal to replace the $82 billion sequester with a moderate package of spending cuts and tax hikes. What was once a clear statement on spending cuts is now turning into a fight over deficit financing, with tax hikes seeping into the debate.

Should the sequestration actually take place, long term debt still remains problematic; the cuts would only slow the rate of increase of the federal debt. The Congressional Budget Office’s latest budget numbers paint a mixed picture of our fiscal health, with claims that this year’s deficit will be the first below $1 trillion since 2008. Yet, the drop in the size of the deficit derives from a boost in revenue due to a moderate uptick in economic growth. Nothing has changed on the spending side: the budget continues on autopilot, with discretionary spending swamped by large and increasing spending on mandatory programs. The CBO report, even with its more favorable deficit forecasts, indicates that the long term outlook is troubling, with federal debt crossing the $20 trillion threshold in just 10 years. And as many commenters have noted, the scenario is even scarier just beyond the 10-year horizon of the forecast – the debt explodes.

Even more disconcerting, it is not evident that the federal government’s spending has improved the nation’s economy. Unemployment remains stubbornly high, and economic growth remains modest. In fact, many economists question the robustness of our economy, suggesting that structural—rather than cyclical—problems are the greatest challenge for economic growth. Economists Robert Gordon and Tyler Cowen both suggest that the significant economic growth over the last century resulted from a burst of innovation that may have run its course. If so, the massive stimulus programs and pump-priming will do little to correct the trajectory of the economy. Of course, Keynes was famous for saying that in the long run we are all dead, and the Keynesians put their hopes in short-term solutions. But if, in fact, we are on a lower growth path until innovation and enhanced productivity can lift the economy, perhaps it is worth addressing what we know to be long-term economic problems. These include the growing burden of debt, the mismatch between worker skillsets and employer needs, the policy uncertainty generated by an expansive regulatory state, and unnecessary impediments that hamper entrepreneurs and stifle innovation.

Of course, this means tackling the tough questions of entitlement reform rather than simply borrowing more money. But it also means rethinking the failing public education system and allowing parents and students the opportunity to choose educational opportunities that prepare students for today’s workforce. And it means revisiting the burdensome regulations that impose significant costs on businesses and deter innovation. Finally, it means fundamental tax reform that removes the twists and turns that have made our tax code a revenue stream for crony capitalists.

Instead, it appears as if our elected officials have opted to govern by not governing. The looming sequestration threatens to heave the budget axe that no politician appears to have the fortitude to wield. Although crude, at least the sequestration would put the spending cuts in motion. The president’s efforts to dull the blow merely delay any substantive reforms, leaving the hard questions for the next crisis. The sooner that long-term budget concerns are addressed, the more thoughtful the solutions can be. Crisis management is no way to run a country.

 

Wayne Brough is the Chief Economist and Vice President of Research at FreedomWorks.

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