Fixing the Budget: Don't Hold Your Breath

Practical Economics

Fixing the Budget: Don't Hold Your Breath

Waiting for the election to solve America’s fiscal problems? Guess again.

Don’t expect the White House and Congress to tackle the federal budget problem soon after Election Day, no matter who wins the White House.

The conventional wisdom is that although there won’t be any action on the budget until after the November election, Congress will have to do something in a postelection lame-duck session next fall or early in 2013. Otherwise, deep and automatic spending cuts are due to take effect next year.

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But the two parties are so far apart that there’s little prospect for a budget compromise, barring a landslide victory for one side that right now looks beyond reach. Even if Republicans win the presidency and both houses of Congress -- which still seems unlikely -- Democrats will have enough seats in the Senate to block major spending cuts or tax reduction bills.

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The problems will become more difficult to solve as time goes on and costs mount each year. Budget experts from both parties warn that the point at which small fixes will still do the job is rapidly passing by. And costs for financing government borrowing will mushroom as interest rates begin to rise again, widening the gap even further.


Moreover, the tax-cutting plans of all three major GOP presidential candidates would pare revenues sharply over the next several years, potentially widening the budget deficit, unless the economy rebounds sharply. Obama’s proposed “millionaire’s tax” wouldn’t do much to close the gap, either. Most analysts give these plans little prospect of passage anyway.

The dim prospects shouldn’t be a surprise. Previous efforts to force Congress to put its budgetary house in order have failed. In 1974 it created the House and Senate budget committees, which were supposed to bring order to the budget process, but lawmakers soon found ways to circumvent them. Eleven years later, Congress passed the Gramm-Rudman-Hollings Act, which sought to put teeth into its rules by mandating automatic spending cuts if lawmakers didn’t meet budget targets. The White House and Congress similarly devised maneuvers to render those rules meaningless. In the early 1990s, there was a series of bipartisan budget deals, but they didn’t cut deeply enough.

The closest the government came to budget making success was in the late 1990s, when a combination of smaller spending increases and a booming economy brought the budget into the black, and raised prospects of continued surpluses for years. But the economy fell into a recession and Washington cut taxes and boosted spending, bringing big deficits back.

How to put fiscal policy back on track isn’t a mystery. Dozens of blue ribbon commissions and think tank reports have laid out credible proposals, almost all of them involving spending cuts and higher taxes. But none of the plans have gained any traction. As Robert Reischauer, former director of the Congressional Budget Office, says, even the most sensible solutions are “easy to demagogue.”


There still are some parts of the budget problem that can be fixed with modest tinkering. Lawmakers could put Social Security back on solid footing by raising the retirement age for future seniors, increasing the payroll tax slightly, and trimming benefits for future retirees who have earned high salaries while they’ve been working.

The budget problem needn’t require across-the-board spending cuts to fix, Alan Blinder, former Federal Reserve vice chairman, pointed out in a Wall Street Journal op-ed piece January 19. Take steps to rein in the soaring costs of the Medicare and Medicaid programs, and the bulk of the problem is solved, Blinder says.

But Congress is unlikely to touch those programs, and it hasn’t yet begun to consider ways to trim the outlay for other growing entitlement programs. Democrats have refused even the most sensible reductions in benefits. Republicans are equally adamant in opposing higher taxes, even though taxes are low in historical terms.

The past year’s much-ballyhooed voter backlash against Congress isn’t likely to spur lawmakers to serious action. Although many Americans say they support the tea party’s demand that the budget deficit be reduced, they’re sharply divided over which federal programs to cut. So the pressure is relieved.


Indeed, polls show that a large proportion of voters hold misguided notions about how much the government spends on major programs. Most think America is spending far more on foreign aid than it is, and that huge sums can be saved by cracking down on waste, fraud and abuse.

The large spending cuts that are scheduled to start automatically in 2013 aren’t written in stone. Lawmakers still will have time after the election to find ways to get around them, or simply could vote to revise the mandates. Many of the spending and tax changes are due to take place in several years, so decisions on the biggest cuts could be in late 2013 or beyond.

That means it’s still a good bet that lawmakers will find a way to kick the budget can down the road again. At best, that means postponing any effort to revamp Medicare and other entitlement programs that are the biggest threat to the budget. The United States still can’t achieve a rational fiscal policy, and probably won’t be able to for years.

So far, Washington’s failure to fix the budget problem hasn’t put the nation into any financial danger. Despite the hullabaloo last spring -- and the downgrading of America’s credit rating -- foreigners are still willing to buy Treasury securities. The budget dilemma is a long-term problem. Washington isn’t really on the verge of default.


But the budget picture is deteriorating, and the opportunity to put the nation’s fiscal house in order by making relatively modest changes early is being squandered. The uncertainty is undoubtedly deterring expansion and hiring by businesses and hurting consumer confidence. Unfortunately, those bad effects will continue.