Spending Denialists and the Fiscal Illusion

The late economist James Buchanan predicted our current budgetary impasse. Is there a way out?

Several weeks before the slow-motion "fiscal cliff" negotiation ended in a giveaway-rich, tax-hiking, 154-page spending bill that senators had all of six minutes to glance at before approving by an 89-8 vote in the wee hours of January 1, President Barack Obama reportedly told House Speaker John Boehner flat out: "We don't have a spending problem."

Boehner, in relaying the quote to The Wall Street Journal three days after the House of Representatives grudgingly ratified the Senate plan, expressed astonishment at the president's words. But he shouldn't have. Spending denialism—of the literal sort—has become a core progressive value in the age of Obama.

"Spending isn't the problem," Steve Benen wrote at Rachel Maddow's blog in December. "We don't have a spending problem. We have an aging problem," seconded Mother Jones's Kevin Drum in January. "We don't have a spending problem, we have a military spending problem," chimed in The Washington Post's Ezra Klein.

Such confident consensus would be more convincing if not for the fact that federal spending rose from $1.77 trillion in fiscal year 2000 to $3.72 trillion in 2010. If spending growth had been pegged to the rates of inflation and population, Washington would still be doling out less than $3 trillion a year, and the fiscal conversation would be about surpluses, not debt ceilings.

These were the types of things Democrats used to care about, or at least pretend to care about, back when it was Republicans running up the national credit card. "We will maintain fiscal responsibility, so that we do not mortgage our children's future on a mountain of debt," the 2008 Democratic Party Platform promised. "What we have done is kicked this can down the road," Obama told The Washington Post just before taking office. "We are now at the end of the road and are not in a position to kick it any further."

That was then. Now we live in a world where the Senate Finance Committee hasn't passed a budget since April 2009, preferring instead to legislate via panicky, lobbyist-crafted spending resolutions like the fiscal cliff avoidance package. Those long-term entitlement reforms that Obama promised to stop kicking down the road? Despite triggering the whole fiscal-cliff negotiations in the first place—recall that the January 1 "sequester" deal was only a backup plan in case bipartisan negotiators failed to come up with a strategy to cope with Baby Boomer entitlements—Social Security and Medicare escaped the new agreement unscathed.

It's easy, and accurate, to blame denialist Democrats for this sorry state of affairs. But there's another reason that John Boehner should not have been surprised to hear a politician say "We don't have a spending problem." After all, the man almost certainly owns a mirror.

In January 2011, after a wave of spending-averse Tea Party freshmen restored a Republican majority to Congress and elevated Boehner from minority leader to speaker, he was asked by NBC's Brian Williams to name just one "program right now that we could do without." Boehner's answer? "I don't think I have one off the top of my head."

This is what has passed for Republican political thinking (or, if you prefer, courage) for far too long. Karl Rove, hands still awash in the red ink he helped unleash during the presidency of George W. Bush, advocated in a January Wall Street Journal op-ed that Republicans shy away from naming their own areas to cut (and even from cutting spending overall), and instead take the political cover of backing cuts in spending growth suggested by the bipartisan National Commission on Fiscal Responsibility and Reform.

Republicans, it would seem, are caught in a vise. On one side is their general philosophical belief that government should be smaller, which, happily enough, is shared by a healthy portion of the country. Respondents to a December Washington Post poll, when given a choice to favor either spending cuts or tax increases in a combination fiscal package, supported spending cuts by a margin of 47 percent to 10 percent. Rasmussen Reports in late December found 62 percent of Americans favoring an across-the-board spending cut. The Reason-Rupe poll has found similar dramatic preferences for spending cuts over taxes.

But public opinion, or fear of it anyway, forms the other side of the GOP vise, too. Voters may favor spending cuts generally, but they punish politicians who propose them specifically, or so goes the theory. As the ever-cautious Mitt Romney memorably answered when The Weekly Standard asked him in April 2012 whether he would eliminate or combine federal departments, "The answer is yes, but I'm not going to give you a list right now."

Much of this lamentable political and fiscal dynamic was foretold by the great Nobel Prize–winning economist James Buchanan, who died in January at age 93. Buchanan was the leading popularizer of public choice theory, which observes that politicians and government functionaries respond to incentives not necessarily aligned with the public good. Midway through the Reagan presidency, he wrote: "The attractiveness of financing spending by debt issue to the elected politicians should be obvious. Borrowing allows spending to be made that will yield immediate political payoffs without the incurring of any immediate political cost."

What's more, Buchanan warned, "the replacement of current tax financing by government borrowing has the effect of reducing the 'perceived price' of government goods and services," with the result that taxpayers "increase their demands for such goods and services." 

It was for this reason that Buchanan favored balanced budget amendments rather than an endless series of tax cuts. If voters knew how much their government actually cost, he reasoned, they might finally get serious about restraining it. As his former colleague Tyler Cowen put it in The New York Times in March 2011, Buchanan "argued that deficit spending would evolve into a permanent disconnect between spending and revenue, precisely because it brings short-term gains. We end up institutionalizing irresponsibility in the federal government." It's the "fiscal illusion" that creates legislative paralysis in the face of a crushing entitlements burden.

So does this "permanent disconnect" mean that we are locked into what the mainstream press often euphemistically refers to as "structural deficits"? While the head fears yes, the heart says not so fast.

Take a look at Senior Editor Brian Doherty's piece "Congress After Ron Paul" (page 18). There you will see interviews with three new and one returning GOP member of Congress who speak a different language than the generation of Republicans who preceded them. Rep. Thomas Massie of Kentucky favors cutting military spending, and says, "A lot of domestic programs I cannot find a constitutional basis for." Florida's Ted Yoho says out loud what Republicans have long since stopped thinking: eliminate the Department of Education. And Michigan's Justin Amash, the House's heir apparent to Ron Paul, criticizes his colleagues for being "afraid" that "if they are too bold they will be voted out of office."

These are not Karl Rove's Republicans. They're not John Boehner's either—the speaker purged Amash from the House Budget Committee in December, and Amash returned the favor by leading a failed revolt against Boehner's leadership when the 113th Congress was sworn in.

James Buchanan taught us all that in politics and governance, incentives matter. As the fiscal cliff gives way to the debt ceiling impasse and other artificial deadlines to come, intriguing questions linger. Can we finally create incentives to reward politicians who peel the curtain back on the fiscal illusion? Will the GOP, at long bloody last, take concrete steps to cut government? 

The spending denialists might hold the upper hand for the moment, but their political future—and our economic prospects—are brushing up against another truism about deficit spending, made famous by the late Herbert Stein: "If something cannot go on forever, it will stop."