Another Budget Deal That's Good for Washington and Bad for America

Congress pisses down our backs and tells us it's raining.

Advocates of smaller government are justifiably upset by the pork-filled spending bill enacted in December. With goodies for countless special interests, it was more "ominous" than "omnibus." But that wasn't the biggest fiscal hit Congress inflicted on America in 2015. After all, appropriations bills always contain execrable handouts.

The real defeat actually took place two months earlier, when negotiators agreed to bust (for the second time) the federal spending caps imposed as part of the 2011 Budget Control Act. The October deal meant the December legislation redistributed an additional $50 billion of other people's money. That set the stage for the end-of-year Bacchanalia.

That's Not Rain

If GOP leaders had simply admitted they lacked nerve to forge a better deal in the face of an intransigent president, congressional Democrats, and weak-kneed members of their own caucus, that would have been disappointing enough. But they added insult to injury by trying to spin this fiscal surrender into a victory.

When the agreement to bust the spending caps was first announced, the top Republican in the Senate, Majority Leader Mitch McConnell (R–Ky.), declared it (in Politico's paraphrasing) "a key win for Republicans." And when the December spending bill was unveiled, Politico reported that "Speaker Paul Ryan told House Republicans on Monday night that the yearlong $1.1 trillion government-funding bill contains policy victories for the GOP."

The only appropriate response is Captain Fletcher's line in The Outlaw Josey Wales: "Don't piss down my back and tell me it's raining."

Some conservatives defended the deal on grounds that it was necessary medicine to protect against a round of automatic budget cuts known as sequestration, which they argued would gut defense by forcing disproportionate cuts. The Pentagon budget makes up less than 25 percent of total outlays, but it would have borne 50 percent of the sequester.

Yet the military still managed to function from 2013 to 2015 under a prior sequester. Moreover, since the United States accounts for more than 45 percent of the world's military spending (with allied nations chipping in about half of the remainder), abiding by the caps would hardly have precipitated a crisis. And even if you think Pentagon spending was cut by too much, that doesn't justify increasing spending for all parts of the budget.

No More Budget Deals

For those of us who have been following the scandals at the Internal Revenue Service (IRS), one of the most disturbing parts of the spending bill was the decision to give the agency an extra $290 million—a 3 percent increase.

What's especially discouraging is that Congress was on track to reduce the agency's $10 billion budget. The Hill explains: "A bill advanced by the House Appropriations Committee earlier this year…would have slashed IRS funding by $838 million, while a bill passed by the Senate Appropriations Committee would have reduced funding by $470 million."

Who's to blame? Who knows? Since the process lacked anything like transparency, we don't know who decided to reward bad behavior at the IRS. All we can say is that the regular appropriations process was producing a result that was moving in the right direction, but we then got omnibus legislation that reversed policy course.

This fits an established pattern: When high-level budget deals are crafted in secret, those who favor bigger government usually emerge victorious. An evergreen joke circulating in D.C. is that Ronald Reagan is still waiting for the $3 of spending cuts he was promised for every $1 of tax hikes in 1982. In 1990, similarly, George H.W. Bush gave up his promise not to raise taxes—and we got more spending, too. A lack of transparency enables politicians to expand government.

The only recent exception to this rule was the deal that produced the Budget Control Act in 2011, which led to President Barack Obama's biggest-ever domestic policy defeat, the sequester. But that victory for taxpayers almost didn't happen. The same law created a "supercommittee" that was designed to lure Republicans into a 1990-style tax increase, in order to avoid sequestration. Fortunately, the process was sufficiently visible that opponents were able to generate grassroots pressure and prevent a bad compromise.

I hate to think what the result would have been if there had been a supercommittee in 2015.

Not the End of the World

The fiscal news from 2015 was not good. And 2016 won't be much better, because the October budget deal also added $30 billion of new spending for 2017. So it's safe to assume more largesse from both parties is on the way.

But there is hope. While the Congressional Budget Office's new 10-year fiscal forecast shows that spending is on an upward trajectory and red ink is climbing, those projections also predict that both nominal economic output and tax revenue will rise by an average of more than 4 percent annually over the next decade.

If the economy and receipts are both climbing by more than 4 percent per year, fiscal progress is possible so long as spending increases by less than that amount. The chart shows that if spending is restrained so that it grows 2.5 percent each year, the budget could be balanced by the end of the 10-year forecast window. And if there's a de facto spending freeze, like we had between 2009 and 2014, the red ink disappears by 2020. All without any tax increases, just with natural revenue growth from a bigger population and an expanding tax base.

But that would require a more courageous Congress than the one we have now.

Good fiscal policy, though, isn't defined by a balanced budget. The real goal should be to shrink the size and scope of Washington, and that means reducing the burden of government spending relative to the productive sector of the economy.

But balance can happen with a modest bit of spending restraint. Simply have government grow slower than the private sector, which should be the Golden Rule of fiscal policy.