April 8, 2012

Federal Baseline Budgeting: A Scam By Any Other Name

by Hal Gershowitz

Comments Below

 

Okay, “scam” might be a little strong.  We’ll just call it a 40-year-old government budgeting procedure that seems to have little redeeming value except for those politicians whose careers depend on grossly misleading the American public. Perhaps that’s why it has endured so long.  When the President (not just this President; any President) tells us he has (or is going to) cut spending, he really doesn’t mean it.  He wants you to believe he means it, but he really doesn’t.

Our government doesn’t budget the way you or we do, or the way most businesses do, or the way any normal organization or institution that wants to survive does. Normally, people or institutions budget by balancing their realistically anticipated expenditures with their realistically anticipated income.  There is really no justification for any other budgeting rationale.  Sometimes we budget some debt to cover those needed expenses that may exceed our anticipated income for some period of time.  The amount of debt we budget in always limited by our understanding that, sooner or later, we must be able to pay back what we borrow as well as the interest our creditors will require to lend us the money we need.   The government doesn’t have to think this way (it should, but it doesn’t have to) because it, and it alone, can simply print any money it needs to pay its current bills and to pay its creditors. It can do this indefinitely as long as creditors are willing to lend it money.  And therein lies the rub.  Creditors may not be willing to lend indefinitely should they perceive that we could not pay them back, or only pay them back by devaluing the money (printing more of it) we use to retire our debt.  We can have a party (a treasury auction) to which no lenders come, at least not at a price we can afford.

Could such a thing happen?  If history is a guide, of course it could. Think Weimar Germany or any of the 32 other countries that have had their currencies utterly collapse during the past 100 years (21 in the past 25 years and 4 in the past 10 years). Or, better yet, think of the half dozen European countries that are, today, hanging on tenterhooks hoping the European Central Bank and the more solvent nations of the continent will, in effect, guarantee their debt (bail them out).  The CBS Sunday Morning Show, as we were writing this essay, was airing an ill-advised mockery of the Republican presidential candidates who warn against pursuing economic policies modeled after the European economic spendthrifts.  Ironically, the only example they used to refute the concern these candidates have raised is Germany (Europe’s economic powerhouse), which itself warns at every opportunity against the profligacy of Greece, Portugal, Italy, Ireland and other countries not to mention Germany’s differences with France about economic policy.  While we have not been sparing of our criticism of much of the Republican primary spectacle, these candidates have been correct in voicing deep concern over the growth of deficits and public debt in the United States.

Given that our current addiction to baseline budgeting is producing $trillion+ deficits year after year, and debt that now exceeds the size of our entire economy, why in the world don’t we send our budgeting process to rehab, or more properly put, why don’t we reform this awful mess.  Well, like a patient that gets hooked on prescription drugs, the process that once had a rational beginning, simply has gone bad. Like the addict, we’ve abused the medicine and now we’re in trouble.

Baseline budgeting is the product of the Congressional Budget Act of 1974.  That’s when this process commenced that has now, in our opinion, gone so terribly wrong.  The Act, innocently enough, directed the Office of Management and Budget (OMB) to project Federal spending for the, then, upcoming fiscal year, assuming that the, then, current level of government services would continue.  It is that assumption that has now morphed into the annual practice of casting in concrete whatever the government is spending in any given year adjusted by whatever else the government decides it will do, along with the added cost of inflation.  We are, thus, each year compounding the cost of operating the government.  What the government tells us are spending cuts are really no more than reductions in the rate of increase.  For the first few years there really was no formal definition of what baseline budgeting was other than a continuation of services as provided in the prior year.  But then, in 1987 Congress added annual inflationary adjustments to the definition of baseline budgeting and we’ve been stuck with compounding budgets ever since.

There have been serious efforts to reform the process such as the Gramm, Rudman Hollings Act, and the Budget Enforcement Act of 1990, which provided rational multi-year targets, but the Senate and House members who wield budget-writing influence invariably protect their respective turfs by weakening all reform proposals.  The budget process itself is not fatally flawed.  Unfortunately, it seems that many of the men and women we elect and send to Washington are.  The US Senate has refused to pass or even consider a budget, even the President’s own proposed budget, for the entirety of his Administration.  Budget rhetoric is often so misleading as to be all but meaningless.

Let’s say a government agency is spending$250 billion and, using baseline budgeting, is slated to have its budget increased to $275 billion. The Administration (or Congress) may, instead, call for an overall increase to $262 billion, or, an increase of $12 billion for the next fiscal year, and then promote the new budget as a $13 billion dollar cut in spending ($275bln – $262bln = -$13bln).  This is like an obese individual who is expected to gain 100 pounds gaining only 75 pounds and then claiming he or she lost 25 pounds. Sounds absurd, doesn’t it?  Yet, that’s precisely how our government justifies its profligacy.

Given that repeated attempts to reform baseline budgeting, including budget caps and pay-as-you-go rules that would require that all new spending be compensated for by either increased revenue or reductions elsewhere invariably fail for the reasons cited above, we think its time to reconsider a modified type of zero-based budgeting, which is commonly used in business.

Realistically, pure zero-based budgeting would not be practical for the operation of the federal government.  The very process of requiring every agency to re-justify every item of expense each year would become costly and wasteful.  Building each agency’s budget from the ground up each and every year would take an entire green-eye-shade bureaucracy in and by itself.

We think a workable compromise between baseline budgeting and pure zero-based budgeting could involve a combination of so-called sunset budgeting for all new programs coupled with an alternate budgeting requirement for all continuing programs every year.  It might work like this: All new spending programs would have a mandated sunset provision, meaning the program would expire on a date certain, unless reauthorized by a super majority in Congress for an additional life, not greater than its original mandate.  Budgeting for all continuing or permanent programs (both discretionary and non-discretionary) would require the annual submission of alternate budgets at, say, 90%, 95% and 98% of the prior year’s expenditure for that budgeted activity.  This would require that every agency or department head go through the process of determining whether there is a more efficient or less expensive way to provide the particular government service for which he or she is responsible.

We believe the cycle of compounding expense must be broken before the government itself goes broke.  Anyone who believes the country can’t go broke because it can always raise taxes or print the money it needs is simply wrong.  At some point squeezing taxpayers, regardless of from whom we squeeze, or running the presses to fund our profligacy will enfeeble the entire nation.  Growth will diminish, and our currency will no longer be the prized coin in the realm of a free market.  Time is growing short. The clock is ticking.

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2 responses to “Federal Baseline Budgeting: A Scam By Any Other Name”

  1. Mark J Levick says:

    It is obvious that neither Party has any interest in making the bureaucrats who run the programs accountable for the funds they appropriate. They tell us we are entitled to life, liberty, healthcare, retirement income, food stamps, perpetual unemployment compensation, job retraining, federally insured bank accounts, and recently a college education all at the expense of the most productive members of Society. The masses are taught that anything less would be unfair. Economic principles are not a part of the equation and thus you have no choral audience for your sermon. The fact that those who glorify those who wish to perpetuate irresponsibility and thus vilify the penurious Tea Party are designated “mainstream” speaks volumes about the death of reason and common sense. While the clock ticks women, blacks, Hispanics, union members, students, environmentalists and farmers are focused on either solidifying their gains or advancing their own agendas. We are leaderless, divided and over indulged. Simpson-Bowles, Paul Ryan, Barak Obama and George Soros all have plans for us. So do each special interest group. Will Mitt Romney have a plan? Will the populace care. If the answer is no, Government of the people, by the politicians and for the
    special interests will not perish from this Earth and our time will be over.

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