Washington’s Baseline Budgeting: Killing Us Softly

We suppose nothing is entirely worthless, not even federal baseline budgeting.  It serves, after all, as a wonderful example of how not to do something, especially how not to do budgets.  But that is about the only positive thing we can say about the insidious and burdensome incrementalism that masquerades as serious budgeting by our federal government. It is a sham. It is costly and it is wasteful and, quite frankly, it is killing us.

Congress instituted baseline budgeting in 1974 to keep President Nixon from impounding appropriated funds that he considered wasteful. Attempts to scuttle this bizarre budgeting process in subsequent congresses have failed, so baseline budgeting is still the process by which we develop a budget for each future year. Up until Nixon and Watergate, presidents from time immemorial would submit their budgets to set the course for national spending. While Congress would often try to increase funding for their pet programs, President Nixon would have none of it and began impounding or withholding some funds from agencies he didn’t support. But when Watergate hobbled Nixon, Congress struck back by passing the Congressional Budget Act of 1974.

The bill prohibited presidential impounding and created the Office of Management and Budget (OMB) to prepare projections of federal spending “based on the continuation of the existing level of government services.” In 1985, the Deficit Control Act ensured that spending would be adjusted to keep pace with inflation. Now, with every item in the budget increasing between 3 to 10 percent every year, to get more money, agencies just keep spending. When new budget programs are created, they become part of the baseline resulting in more money the following year without any formal action by Congress.  Of course, during the Obama years Congress has passed no budgets (even though it is required to by law), primarily because members of his own party do not want to be on record as voting for the President’s deficits.

With baseline budgeting, current-year spending levels (the “baseline”) are used to lock in future funding requirements. The baseline budgeting formula calculates that future budgets will equal the current budget times the inflation rate, plus the population growth rate.  IT ASSUMES that every dollar is well spent, needed and must continue with some enhancement on and on into the future.

When President Obama (or any recent President) claims that he has reduced spending he, invariably, is referring to a reduced amount of planned increase, and not a real reduction in spending at all. Let’s say inflation was running 2.0% and population growth was increasing 2%, the baseline budget for fiscal 2014 would be fiscal 2013’s budget plus 4.0%.  Believe it or not, that budget wouldn’t be viewed by Congress or the President as a budget increase. Only growth above 4.0% would be considered an increase.  And, if the budget for the government increased by less than 4.0%, that would be considered a budget cut.  Thus, the cuts the president offered in the recent negotiations were nothing more than cuts from the baseline, not real cuts in real spending. Almost all political budget talk is Orwellian in the way it perverts language, misleads the public and distorts the national fisc.  How’s that for wise budgeting?  How’s that for stewardship of taxpayer money?  Any wonder why our nation’s debt is well on the way to dwarfing the size of the entire economy.

Let us be specific.  America’s public debt (government-issued debt instruments held by foreign and domestic investors, large and small) will, according to the Congressional Budget Office, equal 200% of the size of the entire economy in about 25 years, and surpass the level at which economies begin a downward spiral (90% of GDP) within the next ten years.  All of our elected officials measure their careers in much shorter spans of time.  Putting aside re-elections that are never certain, the President lives in a four-year time frame, senators in six-year time frames and US representatives in two-year time frames.  Thus, the crisis they know is coming will occur, more than likely, on someone else’s watch.  That reality informs their judgment and that is why we continue to have baseline budgeting.

Actually, it gets worse.  Notice that in the preceding paragraph we referred only to the nation’s public debt.  But that’s only part of the picture. It does not include the debt the government owes to the Social Security Administration (in other words, the money it owes to you and your children and your grandchildren) or to any other government program that has made other entitlement promises to the people it cannot hope to keep.  When we add in these unfunded liabilities, the burden far exceeds the size of the entire economy.

So let’s focus on the greatest driver of our unfunded liabilities, Social Security (and now Medicare).  The nation benefited handsomely from the baby boomer bulge.  The baby boomers, as they became working members of American society, flooded the tax coffers with payroll tax revenue far in excess of what was needed to payout to, then current, retirees.  So far so good.  As any responsible actuary knows, such surplus funds would ordinarily be soundly invested so that adequate funds would be on hand to service the retirement needs of those who paid into the system during their working years.

That’s the way investment programs work unless they are managed by people like Bernie Madoff or Charlie Ponzi or, um, our federal government.  Just as Madoff and Ponzi, helped themselves to the money people had “invested” with them by using new money from suckers to pay out to prior investors, Uncle Sam spends the money from current social security payroll taxpayers to fund its current excesses.  But just as Madoff and Ponzi discovered that the new money coming in, sooner or later, fails to keep pace with the money that has to be paid out, America is far short the number of current workers needed to fund current (let alone future) retirees.  Now Uncle Sam does, in all fairness, have certain escape mechanisms that aren’t available to the Madoffs or Ponzis of the world.  Uncle Sam can simply print whatever money he needs to pay his debts (of course the money will be worth less) or he can simply raise taxes to make up for the missing funds.  That means higher taxes, since the high level of U.S. debt will probably compromise further loans from investors (or make them too expensive).  Of course, Washington’s worst kept secret is simply that those promised benefits will have to be curtailed, either to retirees younger than 70, or to those who are higher earners and therefore may not be as dependent on Social Security payments to fund their retirement.

Economists Rogoff and Reinhart (whom we have often cited in these essays) in their comprehensive retrospective of 200 years of economic history, make a compelling case that whenever debt exceeds 90% of any country’s GDP (except in wartime) the country falls into economic decline.  The politicians who have led their nations into such economic rat holes have always had some justification for doing that.  “This time it is different,” they would invariably proclaim as they plunged their nations deeper and deeper into debt.  Except it never was different and the result has always been the same.  That’s why Rogoff and Reinhart titled their best-selling study, “This Time It’s Different.”

Well it isn’t different.  We are spending, borrowing, printing and burdening our children and grandchildren irresponsibly.  Sadly, we are turning the American Dream into a pipe dream.