Economy / Tax

Better to Sequester

The CBO Financial Report for 2011 was released this week.  It concludes substantially more reform is needed to address the current lack of fiscal discipline and the looming funding gap for mandatory spending programs as baby-boomers begin to retire in greater numbers. These are not new insights, and the recommendations for solving the deficit culture in Washington have been trumpeted long before now. It is the stubbornness of big government advocates, Democrats and Republicans alike, that continues to make effective and reasonable budget reform an exercise in futility. Time and time again, the results prove that “our better selves” are not nearly as persuasive as “our greedy selves” when given a blank check. Republicans have taken significant flack for being anti-science when raising skepticism of human influence in climate change.[i] Regardless of the validity of this accusation, it logically follows that big government advocates who continue to argue the debt and perpetual deficits are not an issue for immediate concern are anti-mathematics.[ii]

Mathematics are useful for problem solving because math defines all problems with a formula, and often the most complex formulas have multiple solutions. Having multiple solutions to a policy problem provides a range of solutions to reach targeted results. Unfortunately, political results are often governed by game theory, not mathematics. Congress, jointly and severally, is willing to postpone accomplishing meaningful reforms in order to manipulate the scoreboard that tallies red and blue. Neither side is willing to give up a little in order to improve the overall financial stability of the nation.[iii]

Negotiations are effective when both parties to the negotiation have something of value to offer.  It would follow that to be an asset at the negotiating table, one must not take all his valuables off the table.[iv] Instead of coming to the table for a negotiation, budget talks have become a political show of strength.[v] The Super-committee, and budget negotiations generally, have failed because both sides refuse to offer real reforms of value to the other side.

It is clear that Congress requires strict rules of budget formulation to incentivize bipartisan policy making, fruitful budget negotiations, and appropriately measured responses to eliminate absurd levels of deficit spending. These appropriation restraints are not a novel idea, a robust system of enforcement mechanisms existed throughout the 90s.[vi] The Budget Enforcement Act (BEA) eliminated annual deficit targets and instituted targets for discretionary spending. BEA implemented “pay-as-you-go” (PAYGO) restrictions on taxes and entitlement spending (excluding Social Security), requiring that new legislation match new spending with equal increases in revenues.[vii]

These budget rules applied to changes in policy rather than tax rates, or budget line items. By designing the restraints this way, exogenous economic fluctuations causing changes in revenue would be ignored for mandatory spending programs, but provided caps for discretionary spending. Unfortunately, just before the BEA expired, Congress found methods to avoid triggering the sequestration rules. “Emergency” spending became trendy in a time of budget surpluses. Meaning any attempt to reinstitute the rules of the BEA would have to include additional guards against these evasive legislative tactics.

Parties not willing to negotiate in good faith on their own need a budget dooms-day device to incentivize cooperation. When this is the case, sequestration is always the answer.

[i] The environmental phenomena formerly known as global warming.

[ii] America is weak in math and science education, but that is another topic.

[iii] In economics this is called the Prisoner’s Dilemma, in Congress it is more appropriately called a lack of leadership (leadership in the sense that “the people” elect representatives to lead the country, not in the context of party leadership).

[iv] Unless the one is Chuck Norris, in which case he already Judo-chopped the table in half, game over.

[v] In an arm wrestling match between Congressman Boehner and Senator Reid, I’ve got my money on the self-admitted G.T.L. enthusiast.

[vi] As it is in Portland, the Dream of the 90s is alive in the budget reform community.

[vii] Or in the reverse, match tax cuts with equal reductions in spending.