Economics

The Never-Ending Budget Battle

Writing rules to stop Congress from spending is hopeless.

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This year, for the first time in modern history, the Senate failed to pass a budget. That sounds dramatic, but last year the House failed at the same task. A few years before that, the House and the Senate each wrote their own budgets, but failed to agree in conference. Each time, the president ended up signing massive omnibus spending bills—at ever-increasing expense to taxpayers.

The budget process is broken, and public interest in reforming it is keen. But changing the budget rules alone is unlikely to fix our fiscal woes. Even properly designed constraints, in order to be effective, would require credible external and internal enforcement backed by public opinion. Good luck with that. 

Nations have gigantic appetites but only finite resources to fulfill them. A functional budget process should help lawmakers set priorities and separate actual needs from mere desires. Our budget process, obviously, isn't doing that, for several reasons.

First, the budget process fails to provide a clearinghouse for all spending. The federal budget has two basic parts. First is "discretionary" spending, which is subject to the appropriations process every year and includes things such as homeland security, most military spending, and programs like aid to schools. The second is "mandatory" spending, which includes automatic funding for entitlement programs such as Medicare and Social Security that doesn't have to be reauthorized each year. Mandatory spending is roughly 60 percent of total annual outlays, and is set to explode in size and share of overall spending in the upcoming years. Yet entitlements have proven so difficult to reform that Congress has effectively declared them off the table when it comes to budgetary oversight. 

Second, the budget process is designed with a bias toward higher spending. Nearly a dozen different committees in each body of Congress have the power to propose mandatory spending programs. Lack of coordination over how to use taxpayers' dollars creates what economists call the "tragedy of the commons," whereby each committee over-funds its own programs. 

More importantly, the budget process relies on an odd accounting rule—current policy baseline budgeting. Congress is required to start from existing policy baselines to adjust a program's annual funding. Therefore, if the current policy baseline for a program mandates a 10 percent increase, even a 9 percent increase is considered a "cut." That's how we end up with headlines like "Ryan Plan to Cut $4 Trillion," when the Wisconsin representative's proposal would actually increase spending by $1.8 trillion over 10 years. 

Lastly, the budget process is extremely complex and difficult to navigate. As a result, politicians often create, preserve, and exploit loopholes to protect programs that benefit their constituents. This is no way to write a budget.

But would changing the process for producing budgets be enough to control our fiscal problems? Unlikely. 

Effective rules can be designed in theory, but in practice rules are designed by individuals with vested interests. Take the Balanced Budget and Emergency Deficit Control Act of 1985, commonly known as Gramm-Rudman-Hollings (GRH). Gramm-Rudman-Hollings reflected a commitment to reduce deficits but failed miserably because its design made it unworkable. It was then replaced by the Balanced Budget and Emergency Deficit Control Reaffirmation Act in 1987 which also failed and was itself replaced three years later by the Budget Enforcement Act (BEA). BEA provisions were mainly ignored and soon replaced by the Balanced Budget Act (BBA) of 1997. When the budget was finally balanced in 1998, lawmakers started to ignore BBA rules until it expired entirely in 2002. (See figure.)

While lawmakers may want, in theory, to control spending, they are unwilling to cut the spending they care about. President Ronald Reagan, for instance, wanted defense spending sheltered from the GRH rules even if it meant he had to agree to spare entitlement spending from any cuts in exchange. Similarly, the Pay-as-You-Go rules put in place by Gramm-Rudman-Hollings were meant to control new mandatory spending while leaving untouched what was already on the books. More recently, the House symbolically passed the Cut, Cap, and Balance Act of 2011, but this plan exempts the sources of our future fiscal imbalance: interest on the debt, Medicare, Social Security, war on terror spending, and veterans' health care benefits. 

These attempts at discipline failed, in part, because most budget agreements can't effectively constrain future Congresses from changing the rules or letting them expire. This is why Rochester University and Mercatus Center scholar David Primo has called for constitutional budget reform. "Constitutional budget reform is necessary to tie the hands of Congress," he says, "since legislators always want to spend more and have demonstrated many times how easy it is to evade or undo statutory or internal chamber rules when they stood in the way of more spending."

But can new constitutional rules create the needed political consensus to constrain spending? Not likely. As Stan Collender, a partner at Qorvis Communications and a former staffer for the House and Senate Budget Committees, explains in an email, "A balanced budget amendment to the Constitution would be the fiscal policy version of Prohibition because there likely would be widespread evasion. Aside from the legal enforcement issues, there would be endless ways to get around the restriction. Congress could pass a budget that appears balanced by assuming economic growth that is much higher than it actually thinks will occur. It could also divide the budget into capital and operating expenses as almost all states do and then balance the operating budget by transferring spending into the capital budget. And these are just the start."

The pursuit of budget reform will lead us back to concerns that occupied the classical political economists, such as Adam Smith. As F.A. Hayek wrote in 1948, "Smith's chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they are now, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid."

Creating rules to restrain spending is tricky, thanks to a variety of weaknesses in the institutional arrangements of the budget process. Until lawmakers are truly committed to cutting spending, they will design rules that fail to adequately constrain them—and they will find ways to evade even the toughest rules. The bottom line is that until they have no choice, Congress will continue gorging on our tax dollars. 

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.