Neil H. Buchanan

The Draft Proposal from the Co-Chairs of the Deficit Commission: Cutting Spending Without Rhyme or Reason

Thursday, November 18, 2010

Last week, the co-chairs of the National Commission on Fiscal Responsibility and Reform (more commonly known as the President's Deficit Commission) unexpectedly issued a "Draft Proposal" to the public. That proposal, which arrived in the form of a fifty-slide PowerPoint file, purports to point the way toward a bipartisan compromise on federal taxing and spending priorities. The authors propose changes to the federal government's taxing and spending programs and procedures, mixing together general suggestions with specific recommendations.

By its very nature, such a broad proposal is open to attack on its specifics -- disagreements over whether a particular program should be cut, or a specific item in the tax code changed. The larger problem with the proposal, however, is that it is ultimately not based on a coherent set of principles. The proposal invokes various feel-good notions about shared sacrifice, but its actual recommendations simply amount to cutting for the sake of cutting. While this approach is surely pleasing to adherents of the conventional wisdom that government is "out of control," it does not promote a sensible idea of how to govern the country.

The stakes in this debate are high. If the co-chairs' proposal is adopted -- or if their unprincipled approach to setting spending and taxing priorities is used to guide the creation of any other deficit-reduction plans -- America will be harmed, today and in the future.

The Deficit Commission's Stated Goals: Platitudes are No Substitute for Substance

President Obama created the Deficit Commission earlier this year, by executive order. The idea of such a commission was originally sponsored by Senate Republicans; but they voted against the commission once the President announced that he was in favor of it. Even so, the commission was set up as a bipartisan exercise. The co-chairs are Alan Simpson, a long-serving former Republican U.S. Senator from Wyoming, and Erskine Bowles, a former Chief of Staff in the Clinton White House. They and the other sixteen members of the commission have been holding hearings over the course of this year, aiming toward a December 1st deadline for issuing a final report. That final report will not, however, be presented to Congress for a vote unless fourteen of the eighteen members vote in favor of it.

This structure all but guarantees that the final report will take one of two forms: Either it will be a proposal that is so completely watered down as to be useless with respect to addressing its stated goal, or it will be a fractured series of proposals, each of which has the support of fewer than the necessary supermajority of members. The co-chairs' proposal, therefore, was an evident attempt to pre-empt the broader committee by purporting to offer a grand bipartisan compromise, with both a Republican and a Democrat agreeing on unpleasant cuts in a classic give-and-take, but in reality, offering a result that will be ineffective, incapable of being adopted, or both.

The co-chairs would have us believe that they worked hard, that they sweated the details, and that both men emerged unhappy about many specific elements -- but proud to have found some middle ground. If all of that sounds a bit rich, that is because it is. Both co-chairs have built their reputations on being anti-government and in favor of cuts in spending. This is not a matter of two ideologically-opposed combatants finding common ground. Rather, it is two like-minded ideologues, who happen to be from opposite parties, having fun ignoring the people in their parties with whom they often disagree.

The proposal, naturally enough, begins with a series of platitudes with which few could disagree: vowing "to give our children and grandchildren a better life" and "make America strong for the long haul." Even within those platitudes, however, the co-chairs offer a series of assertions that will sound familiar to anyone who has ever listened to a sermon from the church of fiscal austerity. The very first bullet point insists that we need "a plan to get this crushing debt burden off our back." We are told that there must be "shared sacrifice -- and Washington should lead the way and tighten its belt." The call to austerity could not be louder.

The proposal does, at least, insist that we must "protect the truly disadvantaged" -- without, of course, defining what it means to be truly disadvantaged, and without stating how much protection should be provided for those unfortunate souls. This nod to compassion provides cover for the bulk of the ideas in the proposal, which would systematically weaken and remove many of the protections that have kept people (however tenuously) in the middle class.

Cutting Spending for the Sake of Cutting Spending is No Better than Unprincipled Spending

The central problem with the co-chairs' proposal is actually rather simple: The driving idea behind the vast majority of its proposals is that spending cuts are presumptively wise policy. Occasionally, the proposal suggests that it is important not to cut indiscriminately, but the proposal shows its authors' true priorities by adopting a series of arbitrary benchmarks to reduce spending, deficits, and debt.

For example, the proposal includes among "Our Guiding Principles and Values" the assertion that spending and taxes must both be capped at 21% of GDP. Why 21%? They do not say. Later, the co-chairs announce that the elements of their proposal will reduce the ratio of federal debt to GDP to 60% in 2024 and then to 40% in 2037. Where do those numbers come from? Again, the document provides no clue. In the 1990's, the European Union adopted a limit of debt-to-GDP of 60% for all of its members; but there was no economic theory supporting that number, then or now. The 40% target is even more mysterious and arbitrary.

Of course, one might argue that these goals, however arbitrary, could be useful benchmarks in allowing the country to pay down its debt. The problem with that claim, however, is that there is no good reason why a country should want to pay down its debt in the first place. Doing so, after all, requires the government to collect much more in taxes -- year after year -- than it spends on services to its citizens. If government spending is, as the co-chairs both seem to assume, inherently wasteful, then it should be cut in any event. Even a country with zero debt, after all, would not want to tax its citizens in order to pay for wasteful programs. But paying down the debt means forcing citizens to pay more into the government than they are receiving from it.

Keeping the debt at a higher level does require paying interest on that debt, but that is not necessarily a bad idea. Indeed, well-run corporations are routinely in long-term debt; and notably, they do not pay down their debt even when they are flush with cash. Debt management is an important part of any well-run organization's financial planning; yet the co-chairs' proposal treats debt as uniformly bad. The only wonder is why they stopped at 40%, rather than going even lower with their benchmark.

This use of arbitrary benchmarks shows up elsewhere in the report, as well. The proposal includes a plan to reduce the budgets of Congress and the White House by 15%, and to cut the federal workforce by 10%. As I argued in a recent FindLaw column, the operative -- and entirely erroneous -- assumption in such gratuitous swipes at government workers is that all government workers are expendable; that they need to be cut loose from the government and get "real jobs."

This rhetoric is hardly confined to Republicans; Democrats employ it too. For example, during the Clinton Administration, I attended a speech by one of the president's economists. He spent the first part of his speech talking about his staff's great work, saying that the mission of his office could not possibly be met without their high level of professionalism and competence. He then described the supposedly great achievement of the Clinton Administration in cutting the federal work force, citing the numbers of people who were no longer working for the government. During the question-and-answer session, I asked him why we should not lay off his entire staff, because doing so would increase further the number of jobs that the Administration could brag about eliminating. The speaker refused to answer the question.

Investing in Future Prosperity: Why is it an Afterthought?

Not surprisingly, the co-chairs' proposal does at least pay lip service to the idea that spending cuts should be undertaken judiciously. The closest the proposal comes to adopting a sensible approach to budgeting is in its suggestion to create a bipartisan "Cut and Invest Committee," which would recommend cuts in wasteful programs and "recommend high priority long-term investments."

This idea could, if carried out correctly, be the basis of a revolution in government budgeting. Indeed, economists have long despaired of the federal government's failure to treat government investments differently than spending that does not have a long-term payoff. In another FindLaw column earlier this year, I outlined a proposal to create a permanent federal board that would identify high-return government investment spending programs and protect them from the budget ax. The basic idea is to stop budget-cutters from eliminating high-value programs (like early-childhood nutrition programs, and infrastructure improvement projects) in the name of cutting the deficit.

If the Cut and Invest Committee were to take on such a role, then we could see a genuine improvement in the federal budgetary process. Unfortunately, however, the co-chairs seem to view this as either window-dressing or simply another way to cut spending. Their proposal includes an estimate that the Cut and Invest Committee would save $11 billion in 2015, which suggests that they have no intention of letting this committee's work actually result in increased spending -- no matter how intelligently the money might be spent.

At a time when the best estimates state that we must undertake more than $2 trillion in necessary spending on infrastructure improvements alone, a Cut and Invest Committee that would recommend a net decline in federal spending is either going to be expected to find levels of "waste, fraud, and abuse" that no one has ever before been able to identify, or is simply going to ignore the "and Invest" part of its title. (The co-chairs' sole nod toward public investment is a suggestion to enact a tax on gasoline to fund transportation improvements. This idea, however, needlessly ties spending on transportation infrastructure to the limits of a specific revenue source, rather than treating such spending as potentially worthwhile investments in future productivity that can pay for themselves.)

Given the political culture in this country in 2010, it is sadly unsurprising that President Obama felt the need to create a committee that was hard-wired to produce a proposal for unnecessary and unprincipled austerity. The "tough choices" that the co-chairs and their defenders tout are, in fact, poor choices. And adopting such an approach to budgeting would make us all poorer, now and in the future.

Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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