Major Budget Reform Must Accommodate Legislators’ Need To Give Away Money

Given the extraordinary level of our national debt, the rise in interest costs as a share of total spending, the scheduled expiration of some big tax cuts after 2025, and the inability under current law for Social Security and Medicare to pay out promised benefits, major budget reform is unavoidable. One approach being suggested around Washington is to empower a commission or summit to devise a plan sometime after the presidential election.

For any such effort to succeed, it is essential to factor in the psychological factors that drive legislators. Here are three necessary and related lessons:

(1)     The bipartisan consensus in Congress to give away money has never gone away and never will.

(2)     Long-term budget reform requires accommodating that dynamic.

(3)     Only by limiting the past’s claim on the future—restoring what I call fiscal democracy—can future budgets both be fiscally sound and allow elected officials to brag about how they respond to new needs, opportunities, and voters’ demands.

Bipartisan Consensus for Giveaways

Despite the current morass in Congress and claims that it can’t do anything, it enacts many giveaways—spending increases and tax cuts—every year. It always has and always will. The enactments usually involve and often require some degree of bipartisanship. In fact, despite the extraordinary level of partisan wrangling today, every bill passed by the current Congress required bipartisanship since the House had a Republican majority and the Senate a Democratic one.

In truth, giveaways are not possible without takeaways—tax increases and spending cuts (more on this below). Elected officials don’t talk much about the takeaways, except when they claim inaccurately that the cost of major reform can be borne only by fraudsters or small segments of the voting population, such as the rich or those welfare recipients who won’t work.

Simply put, money comes into government, and our elected officials—Democrats and Republicans alike—are quite happy to return it to us and, as best as possible, to act as if it cost nothing.

Accommodating the Natural Political Force Favoring Giveaways

That elected officials like to legislate giveaways, not takeaways, is not a criticism; it follows from basic psychology. In our families, we talk more about what we will buy than give up. Employers find it easy to raise nominal wages but extraordinarily difficult to lower them. Also, new needs and opportunities, whether in the family, business, or government, demand new ways to allocate money over time.

Martial arts teachers show students how to channel the forces coming at them rather than simply block them. Similarly, budgetary reform will only succeed if it accommodates politicians’ natural tendency to give away money.

Reality, of course, imposes a constraint. The government and a household can only give away what is taken in, directly or indirectly. While borrowing might require future rather than current payments, those payments still must be made. When federal debt is on an unsustainable growth path, reality imposes an even stricter constraint: Congress’s job is to renege on some past promises for how much future spending will grow and taxes will not.

The Past’s Unreasonable Hold on Our Future

So, how can long-term budget reform tackle the debt issue and allow the need of politicians to engage in giveaways? Isn’t this contradictory? Not really.

The budget issue is not whether elected officials can’t give away more from year to year. Here, we must make a vital distinction: net giveaways are still possible relative to past years’ spending levels; when the budget is on an unsustainable path, net giveaways relative to past promises are not.

So, what secret sauce allows more giveaways relative to the past? Economic growth. I’m not referring to extravagant claims that tax cuts or benefit increases can somehow be defined as investments leading to a massive growth upsurge. Throughout most of U.S. history, our citizens’ ingenuity and hard work have led to almost continual economic growth. Since taxes tend to be enacted as rates assessed on some income or sales tax base, and that base rises with economic growth, so also do revenues.

Accordingly, Congress can but doesn’t need to legislate new tax increases or spending cuts elsewhere to have a government that gives away more money. Even when spending grows unsustainably faster than revenues, all that is required is for the growth rate of spending to be slowed below the growth rate of revenues. That still allows more to be given away relative to the past, regardless of whether government spending increases or declines relative to the size of the growing economy.

I’ve written a book, Dead Men Ruling, about the unique character of our modern budget dilemma. In the past, spending was largely discretionary, and little or no automatic growth was built into future years. Accordingly, revenues grew automatically, but spending did not.

Congress’ job was to engage in enough new giveaways to avoid building up huge surpluses. If debt rose too much under one Congress, the next Congress merely needed to avoid making too many new commitments. By contrast, the nation’s most extensive outlay programs today have permanent growth built into them, with costs that compound at rates faster than the rate of economic growth. Unlike most of the nation’s history, this unsustainable debt path remains even if legislators never pass any new bills.

Put another way, the automatic revenue curve used to grow faster than the automatic spending curve, and there was a lot of money to give away to avoid growing surpluses. Now, the automatic spending curve grows faster than the automatic revenue curve, and there are growing deficits even if no new giveaways are undertaken. Accordingly, there’s no fiscal space or slack to easily accommodate current legislators’ need to tell us what good things they newly do for us.

Long-term budget reform will fail if it merely attempts to reduce the deficit over a limited period. The reforms enacted in the 1980s and 1990s failed to address the long run and are even less adequate to address today’s problems. Similarly, legislation that attempts to be deficit-neutral only for newly legislated giveaways, while ignoring the unsustainable giveaways from the past, merely avoids making the situation worse.

Only restoring fiscal democracy can return to elected officials bragging rights over the giveaways they can claim as their own without adding further to an unsustainable level of debt. I can’t guarantee how good of a job they will do. Given a changing world—think Ukraine, global warming, suicide rates, and so on—I only assert that continually reorienting the nation’s budget path is their job. We need to agree on a budget process that lets them do it.