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The Only Way to Achieve True Fiscal Discipline: Learn Arithmetic

Arithmetic and history.  Two of my favorite subjects in school.  I covered some history two posts ago (the Whisky Rebellion).  Let’s do some arithmetic now. 

Attention is currently focused on threats of a government shut-down, either on March 4, when a continuing resolution is required from Congress in order to keep the government operating, or a few months later, when an increase in the national debt ceiling is required.  The common description of this showdown as a high-stakes game of chicken has it right.   But at least some of the Tea Partiers say that their goal is literally to avoid an increase in the debt ceiling – not just as a bargaining ploy nor as an abstract goal, but in the sense that they want to cut spending so sharply that there is no need to borrow any more after this spring.   Similarly, Senators Mike Lee (Utah) and John Kyl (Ariz.) have revived the proposal for a constitutional amendment requiring a balanced budget.  And of course they all want to do it without raising taxes, and in most cases without cutting defense, Social Security or Medicare.  Oh, and don’t cut farm subsidies either.

Not many people want to spend the time learning about the specific options or making the choices that would be necessary in order genuinely to solve the budget situation, even though a couple of useful websites make it relatively easy to think through the alternatives (NYT or PPC).  

But the proposition that we could eliminate the budget deficit through sufficiently drastic cuts in domestic spending is so far out of line with reality, that the point can be made easily to even the most innumerate congressman.  Here is the arithmetic. 

Total federal spending is $3 ½ trillion in round numbers.    That spending number minus tax revenue left a budget deficit of $1.3 trillion in fiscal year 2010.   Putting aside a very small number of genuinely sincere libertarians like Ron Paul, most Republican congressmen want to exempt defense spending and senior-related spending (Social Security and Medicare), and to make all the cuts in non-defense discretionary spending.  (That was their official platform in November’s election.)     How much would you have to trim non-defense discretionary spending to balance the budget?   Start — as many people would like to – by eliminating all foreign aid.  But contrary to what they think, foreign aid is of course only about 1% of total outlays.  Next imagine zeroing out all of veterans’ benefits, all federal spending on education, and all federal spending on transportation.   That includes programs so popular with their beneficiaries that the congressmen voting for them would be virtually certain to lose re-election.  But some of the freshmen say they are willing to pay that price, so let’s go full speed ahead.   We are only up to 6% of total outlays.   Now eliminate every dime of non-defense discretionary spending: parks, weather service, SEC, FBI, border patrol, politicians’ salaries… everything.  Do you think that closes the gap?    It only gets you half way there!   Domestic discretionary spending is not where the big bucks are.

The arithmetic in fact works out quite simply.    Of the $3 ½ trillion in federal outlays, just under 1/5 is non-defense discretionary spending.   Another 1/5th is defense.   Social security is the third 1/5th.    Medicare is the fourth 1/5th (slightly less now, but far far more in the future).    The last 1/5th is interest on the debt (which will also grow enormously in the future) plus other entitlements.    Numerically speaking, we would have to eliminate not just all non-defense discretionary spending, but also all defense.  Or else all social security spending (but we would have to continue somehow collecting the payroll taxes that are supposed to fund it!).   Or else all Medicare spending.   The unmistakable implication is that a solution to our long-term fiscal problems will have to involve some sharing of sacrifice among each of these five categories.    And increased tax revenue as well.    

Admittedly, the Republican leadership’s goal for the current fiscal year was to reduce domestic spending by “only” $100 billion.   But the freshmen’s position is that this goal is not enough.  (At the same time, they are unable to come up with that much in specific cuts that they are willing to put their names to, for the same familiar reasons.  Domestic discretionary spending is not where the money is.)

A reasonable medium term goal might be to raise taxes as a share of GDP at least to 18%, what it was during the Reagan administration, and to lower spending to 23%, what it was then as well.   Of course these two numbers still leave us with a deficit of 5% of GDP, which was Reagan’s record.  It will take us much longer to get back to the fiscal rectitude of Clinton.   It is not possible to eliminate the need to borrow, in the short run.   

As for the long run, as we all know, the baby boomers are starting to retire and the trends in Social Security and (especially) Medicare are unsustainable.   Ten years ago, if the country thought it was important enough to protect any single category against belt-tightening in the long run – say social security or taxes – it would have been arithmetically possible, by making the cuts elsewhere.    But we no longer have the luxury of such choices after the legacy of the last decade — after the effects of mammoth tax cuts (starting in 2001 and 2003), two wars (2001, 2003), the Medicare prescription drug benefit (2003), and the severe financial crisis and recession (2008).   Starting from our current position, each of the five components must play a role, along with taxes.

Many commentators faulted President Obama for not proposing to cut entitlements when he submitted his budget in early February. They sanctimoniously intone that a true leader would realize that the public wants to hear the truth.   I don’t understand how they can say that with a straight face.   Obama came into office with a mature desire to put childish things aside and a naïve eagerness to be bipartisan.  The response he got was accusations of death panels, an explicit Republican strategy to deprive him of legislative successes (no matter what their content), and the electoral defeat of moderate congressmen in both parties. People who say that Obama should stick his neck out to support some of the radioactive proposals of the Bowles-Simpson deficit-reduction commission have apparently forgotten that he originally asked for ex ante bipartisan blessing for the formation of the commission and a congressional vote on its recommendations, but the Republicans refused.  

It is clear as day that if he broached the sort of specific proposals that are necessary, such as raising the retirement age in the distant future, he would be attacked simultaneously for hurting seniors and for not going far enough fiscally (and it would in many cases be the same people making both attacks, inconsistent as that is).  The point is not just that he would hurt himself politically.  The point is that the inflammatory attacks on the proposals would then entrench positions and make it harder to enact the reforms in the future, not easier.  The White House has explained the danger of “poisoning the well.”  There is no alternative to preserving the true remedies for some future venue where both sides are willing to join hands and make the necessary compromises together.   We have known this political fact for 30 years.  Savvy media commentators would do the same if they were working in the White House; but they don’t consider that criterion relevant when fashioning their critiques.  They have their own audiences to play to.


Originally published at Jeff Frankels Weblog and reproduced here with permission.

One Response to “The Only Way to Achieve True Fiscal Discipline: Learn Arithmetic”

Ed DolanFebruary 28th, 2011 at 1:14 pm

A fine post, thank you. Can’t be said often enough!I would add one point, though: There is a “sixth fifth” in the budget picture, which consists of tax expenditures. The biggest are deductions for interest on retirement plans, employer-paid medical insurance, capital gains and mortgage interest. According to the Urban Institute-Brookings Tax Policy Center, these totaled $701 billion as of 2007, exactly another fifth of the $3.5 trillion federal budget. The total is even bigger if various exemptions from corporate income and other business taxes are included.If there really are any back-room bipartisan negotiations going on (and I hope the rumors are true) tax expenditures are one place there should be a possibility for real compromise. The magnitude of tax expenditures is so large that it would be entirely within the realm of sound budget arithmetic BOTH to increase federal revenues AND substantially cut top marginal rates on corporate and personal income taxes.

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