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What’s Really Novel About the Fiscal Standoff is the Refusal to Pass a Budget

e21 | 01/23/2013 |

The so-called debt limit crisis is, in actuality, a budget process crisis. The Senate’s refusal to pass a budget resolution since 2009 has deprived Congress of the normal conventions used to establish budget discipline. Without a budget resolution to set revenue and spending aggregates, lawmakers have been forced to instead rely on the debt limit as a mechanism to enforce fiscal discipline. This is obviously far from ideal given the extent to which the threat of default tends to roil financial markets and draws rebuke from the ratings agencies. But the attention paid to the supposed novelty of the debt limit strategy – which has been analogized to hostage taking – has it precisely backwards: opposing a debt limit extension to extract budgetary concessions from the Administration has a long history and is hardly an innovation; what’s new is the refusal to pass a budget and the associated media campaign to suggest that budgets don’t really matter.

The argument on the left seems to be that since government can operate without a budget resolution, a budget resolution must not be all that important. This is sophistry at its worst: Yes, it’s true that the government can operate without a budget resolution. It’s also true that operating without a budget has led directly to trillion dollar annual deficits that have increased the public debt by 36% of GDP over four years – nearly twice as large as the incremental debt generated in any other four-year period in peacetime history. This isn’t a sematic debate about whether a budget is required for appropriations and authorization bills to be enacted into law. The issue is the disastrous fiscal policy that results when lawmakers abdicate their responsibility to present an outline for revenues, outlays, debt and deficits. The suggestion that budget resolutions aren’t important is invalidated by the fiscal policy that results when budget resolutions aren’t passed.

Table 1: Cumulative Four Year Deficits as a Percentage of GDP

Beyond pointing to the budget resolution’s supposed uselessness, progressive commentators also suggest that the budget process itself results in needless politicization. House leaders supposedly demand a Senate budget resolution so as to force Senators “to take an unpopular and divisive vote on abstract tax and spending priorities.” But the current fiscal crisis has its origins in Congress and the President’s unwillingness to confront unpleasant fiscal arithmetic. The more out of balance the nation’s books, the more “unpopular and divisive” the budget process and the greater the incentive for politicians to avoid a budget.

As argued previously, the President wants a larger government than can be accommodated by his desired level of taxation. The Congressional budget process is essential to making this apparent by establishing a common policy baseline and then estimating the scale of changes necessary to stabilize and reduce debt ratios. If the President and his allies refuse to countenance structural changes in Social Security, Medicare, Medicaid, and the new Affordable Care Act (ACA) subsidies, the result will be budget resolutions that generate crippling debt burdens or tax increases over the next 15 to 20 years. While progressives may see this as a game of “gotcha,” it is the first step to establishing a common framework for understanding our fiscal policy options. For example, commentators may not like the policy preferences embodied in the House Budget sponsored by Chairman Paul Ryan, but the program looks a lot less “radical” if one realizes it is the absolute least policymakers would have to do to close the long-run budget gap without raising taxes above the post-war average.

As mentioned at the outset, the use of the debt ceiling to extract concessions from the Administration has a long history. It is well known that then-Senator Obama not only opposed a debt limit increase, but actively worked to prevent it. Progressives tend to acknowledge this history, but argue that this time is different. The difference may simply relate to the effectiveness of the strategy. The debt limit standoff in 2011 generated unwelcome volatility in stock and credit markets, but its real effects were barely discernible. Growth in the second half of 2011 averaged 2.7% (annual rate), well in excess of the 1.5% average since 2009. More significantly, the Budget Control Act it spawned was the first piece of legislation to combat rising debt and deficits since the 2005 reconciliation act.

Today, the focus is to use the debt limit increase to force the Senate to pass a budget and reach a common analytical framework for assessing future policy. One need only read Paul Krugman’s insistence that the deficit problem has been solved to understand how critically important this effort really is. It is popular to criticize Chairman Ryan and the House leadership for failing to provide a “balanced” solution to our fiscal problems, but at least they have the courage to acknowledge that a problem exists. Those who deny the scale of the current U.S. fiscal crisis must either be innumerate, in denial about the damaging impact of debt overhang on economic growth, or attempting to cultivate ignorance in the belief that an honest assessment of the facts would lead to unwelcome policy changes. A budget resolution forces all parties to put their cards on the table and moves the debate from platitudes about “balance” to the unpleasant arithmetic the Senate’s attempted to avoid for nearly four years.

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