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Fiscal Sanity and Political Sanity Are Needed on Budget

Earlier this month, Robert Reischauer, president of the Urban Institute and former head of the Congressional Budget Office, presided over the annual Urban Institute Roundtable on the federal budget, where a broad-based group of budget mavens and economic experts gather for a few hours of off-the-record discussions on the president’s budget and its economic and political implications. It is always interesting and enlightening, and usually depressing.

[IMGCAP(1)]This year was no different, except it was perhaps more depressing than usual. The economic news is unsettling, of course, despite the evidence that we may have begun to turn a corner toward recovery. But we are far from out of the woods, and the recovery is likely to be slow, with unemployment continuing to lag. The budget news was a bit better, with the president’s budget getting praised for its greater candor and lesser legerdemain than usual. But perhaps because of its honesty, this is not a budget that provides a road map to real fiscal sanity.

The main vehicle President Barack Obama chose to underscore his commitment to budget discipline was the time-honored and time-tested freeze on discretionary domestic spending. Do not confuse time-honored with good; it is just a common political response to the pressures to do something. Even more, do not confuse time-tested with effective — this is quite the opposite.

This freeze comes after a rapid buildup in many of the discretionary programs, usually a sign of chicanery — but this time it made sense, because much of the spending was countercyclical necessity to stimulate us away from depression and deflation. And this freeze, within the budget at least, was more intellectually honest than previous efforts, showing real trade-offs in programs.

The big problem with it is underscored by a chart compiled by Eugene Steuerle, an Urban Institute economist noted for his relentlessly fair-minded analysis. Steuerle looks at the proportion of government revenues allocated automatically to mandatory programs and the amount left for everything else. In 1962, 65 percent of government revenues were not automatically set aside for mandatory programs — in other words, they were available to be applied by Congress and the president for whatever needs had to be met. In 2009, the number was down to zero — and in the next decade, it will be negative. In other words, every dollar and more of the choices made annually by government to solve problems and meet needs will be financed through deficit spending.

Government has been transformed from a set of programs set and adjusted year to year by politicians responding to short-term and long-term problems to one on automatic pilot. The old phrase I learned in college was, “To budget is to choose.” We no longer choose. And that makes the over-focus on the tiny share of the budget allocated to discretionary domestic spending so discouraging.

Of course, fiscal discipline is fiscal discipline; a dollar saved is saved no matter where it comes from. But the budget reflects some larger and more unsettling problems. First, we seem incapable of a serious and sustained focus on the programs where real money is spent, and where real progress on the debt is necessary. Second, because we are now at a point where every dime of tax revenues goes to finance mandatory spending, meaning especially Medicare, Social Security and Medicaid, we have not been willing to actually raise the revenue necessary to pay for the government we want and get.

I give substantial credit to Rep. Paul Ryan (R-Wis.), who is smart, tough and intellectually honest. He has come up with a budget that actually moves to balance in a reasonable time. His budget includes some truly innovative ideas on taxation and bold approaches on the large mandatory programs. More than likely, Democrats in both chambers will bring the Ryan budget to a vote — and my guess is that perhaps 10 percent of Congressional Republicans will support it. That is because Ryan suggests radically transforming Medicare and Medicaid, eventually moving them away from government-run entities and putting some caps on their annual spending growth, moves to institute some private accounts in Social Security, and takes on sacred cows like the mortgage interest deduction (by proposing a dramatic change in the income tax system).

I will leave to another time any detailed discussion of whether these are good or workable ideas, but they show how much change is truly necessary if we are actually going to move back to real balance, much less to sustainable annual deficits — and underscore how difficult all that will be, even if done gradually.

Unfortunately, we may be as far from political sanity as from the fiscal variety. I noted at the roundtable the surreal nature of our budget politics, focusing on two bizarre factoids. The first is that, Ryan’s new plan aside, the Republican Party, in order to take on the Democrats’ health care reform plans, put itself on record protecting every dollar of Medicare spending in perpetuity. The second is that seven Republican co-sponsors of the bill creating the Gregg-Conrad deficit reduction commission, the best legislative vehicle to begin to get control of future deficits and debt, voted against their own bill! Not that Democrats were all willing to jump onto the commission bandwagon; they are as fearful of serious restraint in favored programs as Republicans are in a serious attempt to raise revenues enough to actually pay for whatever programs are enacted.

In a political world where people defend the fiscally indefensible and vote against their own ideas in order to deny the other team a victory, it is hard to be optimistic. But not impossible. There is no rosy scenario, but there is a rosier scenario. It includes a health care reform package that incorporates more ideas from the House plan and from Republicans in Congress to bend the health cost curve and to bring more rationality and therefore more discipline to the way we deliver services through Medicare. It moves eventually to a meaningful fiscal commission that reaches an accord involving serious long-term budget restraint, including on mandatory programs, and a tax path that begins to narrow the gap between spending and revenues. And it includes a bold tax reform effort that begins to move away from our standard taxes, like income and payroll ones, to better ones, like a value-added or other consumption tax and a carbon tax.

The odds of all of these things happening? Slim indeed. Close to zero. But not zero.

Norman Ornstein is a senior fellow at the American Enterprise Institute.

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