Budgeting by the Inch

The clock is ticking down on the April 8 deadline to produce a 2011 budget (unlikely) or to kick the can down the road with another continuing resolution that avoids a government shutdown (getting unlikelier by the day.)

As I wrote in my March 14 posting, Playing “Chicken” with the White House, the easy stuff was given up in the first two CRs, and the Democrats are now at a point where serious cuts have to be made if the remaining $51 billion in cuts (a paltry sum in comparison to current spending) demanded by the Republicans are to be made. Keep in mind that there is still no 2011 budget, because the 111th Congress couldn’t get one passed even though it held the almost bullet-proof majority that got ObamaCare passed. Absent a budget, all of the current spending is at the same level as the 2010 budget, and it is the spending at that level ($3.55 trillion, 33% of which was deficit spending) that Congress is now haggling over cutting.

My sense is that Congress has given up hope of agreeing on a 2011 budget and is preparing to focus on the 2012 budget. After all, half of fiscal 2011 has passed so why bother?

In the 25 weeks remaining in the 2011 fiscal year, which ends September 30, the Republicans have so far insisted that the cost of signing on to another CR is $2 billion per week. That is such a small amount of the current average weekly federal spending – $68.3 billion per week – you’d think that waste alone could cough it up. But according to the Democrat Senate caucus, cutting spending by $2 billion per week (less than 3%) is “too extreme” and they cite the immeasurable sacrifice that the Republican meat axe would inflict on education, health research, food inspection and other programs and services.” Wow! I hadn’t realized that our federal government had become so efficient that not even 3% of its expenditures is waste.

A $4 billion spending reduction agreed to by the Democrats on March 4 extended government operations two weeks until March 18, and another $6 billion was found to extend operations three weeks to April 8. The word on the street has it that the Dems will offer another $20 billion in cuts – on top of the $10 billion already conceded – if Boehner and the Tea Party are willing to settle for $30 billion instead of $61 billion. That’s unlikely. At least I hope so.

Now it comes down to who blinks first in the “shut the government down” game. A Rasmussen poll released Friday showed that 57% of “likely voters” thought making deep cuts was more important than avoiding a government shutdown. Only 31% thought keeping the government running was more important. Twelve percent had no opinion.

In a Wall Street Journal op-ed this week, pundit Fred Barnes wrote that the incremental strategy the Republicans have been using is working. Since $2 billion a week was a small spending reduction relative to over $68 billion in average weekly authorized spending, Democrats would have a hard time explaining to the voters why cuts of that magnitude were so unacceptable that they justified shutting down government. After all, Republicans had wrung $10 billion in concessions in two tranches from Senate Democrats and the “budget by the inch” strategy would likely continue to work.

I disagree for two reasons. First, Barnes’ argument is based on logic and logic is not part of the political process – certainly not as politics are practiced in Washington. Emotion fuels the political process because each side has a constituency it must posture for or lose their support and both sides are vying to influence the moderate independent, whose vote will determine who wins in 2012. The Independents and each party’s constituent base are so far apart ideologically that the party leaders have to be almost schizophrenic to placate both.

Second, Barnes assumes that either the Democrats or Republicans will rather cause the government to shut down rather than yield their principled stand for the commonweal. The object of this game, however, is to make demands in full knowledge that the other side will reject them so they are blamed for the government shutdown on their unreasonableness – not as the consequence of a reasonable and principled stand.

There is possibly a third reason why I disagree with Barnes. I think Washington has become so politicized that it is dysfunctional.

That seems to be borne out in the results of another recent Rasmussen survey which came out this week. Just 16% of “likely voters” thought it would be better for the country if most incumbents in Congress were reelected. Just 16%! That’s a seven-point drop since last August. Over half (56%) say it would be better if most incumbents were defeated. Ah, but all politics is local, the late “Tip” O’Neill used to say. OK; fewer than one in three “likely voters” think their own representative is the best person for the job. In short, voters are less supportive than ever of congressional incumbents. The latest Gallup puts Congressional disapproval rating at 74% – the lowest in 37 years.

I wonder if Congress really cares what voters think.

The latest CR extension will be expiring in a week at about the same time that Paul Ryan, chairman of the House Budget Committee, releases the Republican’s version of the 2012 budget. Details haven’t been released but it’s safe to say it will be a far cry from Obama’s extraterrestrial 2012 budget calling for $3.73 trillion in spending of which 44% will be borrowed deficit spending. For every $4 that the federal government takes in during FY 2012, Obama wants to spend a little over $7. However, he has hinted that he might be willing to “compromise” and for every $5 taken in, Obama proposes to spend $7. In the Obama “compromise” only the American taxpayer is taken in.

While the 2012 budget will be another opportunity for the Republicans to restore fiscal sanity, remember that the GOP holds only the House; the Senate and White House are still in Democrat hands. So what is the worst thing that can happen if the Congress can’t agree on a 2012 budget? Either it resumes CRs or it shutters government non-essential services. In other words, the GOP has no clout until it gains control of the Senate and the White House or has the ability to override White House vetoes.

After the last CR vote, more than a few on the GOP side grumbled that they hadn’t been sent to Washington to keep the government running in two and three week intervals. In an effort to send a message to Speaker Boehner, 54 Republicans voted against the last CR, but 66 of the 87 first-term GOP lawmakers voted for it, that’s over 75%, and 85 Democrats voted with the Republicans, suggesting some bipartisanship.

Absent a majority in the Senate, Republicans are going to have to win some Democrats to their viewpoint on spending cuts and deficit reductions. Those who are threatening to withhold their vote for future CRs should consider how “no” votes will help them (and other like-minded lawmakers) achieve what they do want to see happen – further cuts in FY 2011 spending and a pared down FY 2012 budget. So far, incremental spending cuts have worked to achieve the first aim. If the Democrats offer to cut $20 billion in addition to the already conceded $10 billion in cuts, and if they say “take it or leave it” because there will be no more FY 2011 cuts, then Republicans will have to decide whether they will accept “half a loaf” or shut down non-essential government services. Shutting down the government might help win public opinion to the spending cutters’ side. Or it might not. It depends on which side can win the public relations war in convincing the Independents as well as their base of the reasonableness of their position. That’s always “iffy” but Independents tend to be better informed politically than other subsets of voters.

As one political pundit recently noted, those who favor bigger government have succeeded in expanding it incrementally. New programs were layered on top of existing programs over many years. This pundit counseled spending cutters to patiently follow the same course in the remaining months of FY 2011.

He is partly correct. Bush and Obama were considerably helped in their mammoth intrusion into the private sector by the unknown and therefore scary impact that the financial market meltdown might have on the American economy. Obama further leveraged the rising unemployment and sagging economy to justify throwing hundreds of billions of dollars into misbegotten stimulus initiatives. His pièce de résistance, however, was ObamaCare, which could have only happened with absolute majorities in the Senate and House and a Democrat in the White House. GOP incremental spending cutters have none of the power levers for large scale spending reductions to reverse the large scale spending increases of the last three years.

But the GOP will have significant leverage in the negotiations to increase the debt ceiling. Sometime between April 15 and May 31 the government will reach its legal borrowing limit and Congress will have to raise it. The Treasury Department has warned of dire consequences if the US can’t borrow more money and fails to pay its interest obligations. Unlike negotiations on the budget, where a government shutdown hangs in the balance, failing to raise the borrowing limit or delaying the payment of interest is in a different league. It will be the best opportunity for conservatives to get a quid pro quo – serious spending reductions for debt limit increases.

What is frustrating to Republicans in the wake of their landslide 2010 elections is that they can’t accomplish more now. It’s hard to swallow that they might not get the remaining $31 billion of the $61 billion they wanted to cut. The shortfall, however, is mostly symbolic; it’s still a small number compared to the $1.7 trillion that will be spent in the remaining 25 weeks of FY 2011.

And regardless of all of the happy talk in the Democrat caucus, every credible poll indicates Republicans will take the Senate in 2012 because they need only a net change of four to gain the majority and Democrats have 23 vulnerable seats to defend. Even Biden admits to the likelihood of a loss of the Senate – and he was the guy who believed the Democrats would hold the House in the last election. Whether a Republican can dispossess the White House of its present incumbent in 2012 is still a question mark. But Republican majorities in the Senate and House will keep Obama in check even if he is reelected, just as they kept Clinton in check when he was reelected.

The biggest threat to America’s long term economic viability, however, is not $61 billion in spending cuts during FY 2011. It is the growing “market share” of government. For six decades government’s “market share” was 20% of the GDP. Twenty percent is what the feds took in as tax receipts and borrowing and 20% is what it spent. The private sector – all of the businesses, families, and individuals – plus state and local governments took the other 80%. That 80/20 share was remarkably stable until Obama came along.

Moreover, despite all of the tinkering with the tax code to get more money out of those nasty old rich folks who never pay their fair share, federal tax revenues have been stayed in a narrow band within one or two percentage points of 18% of the GDP. That’s all the federal government has ever been able to get regardless of tax rates.

Since federal government spending has historically been 20% of the GDP and tax revenues have historically been 18% of GDP, the federal government ran an historic deficit of 2%, which it had to borrow. Borrowing is nothing more than a tax on future generations to pay back – some of whom aren’t yet born and have no representation in Congress. But borrowing has been tame in the past compared to the hockey stick increase in recent years.

The government’s market share began to increase under Bush with wars in Iraq and Afghanistan, an expensive Medicare drug benefit, and education spending – all ill-conceived notions of “compassionate conservatism" (except the wars.) Government’s market share accelerated under Obama because he is admittedly intent on remaking America in a different mold – one in which government had an expanded role. The government’s market share under Obama has shot up to 25%. Tax revenues, which cannot be forced up as history has shown, actually dropped under the weight of a recession, and the shortfall – about 10% of GDP – was made up by borrowing.

Setting political rhetoric aside, the problem that must be solved by this and future Congresses is how to restore government to its historic 20% market share. America can’t afford Obama’s vision and still be America. Government will never – never – create real economic value that comes remotely close to what would be created by restoring the 5% market share the federal government has taken from the private sector.

An Unserious Budget

It is hard to imagine any issue that threatens the future of the Republic more than the current and projected fiscal condition of the US economy. In his first two years in office, Obama has added $3 trillion to the national debt. His 2012 budget delivered on Monday – ironically Valentine’s Day – shows yet a third year of trillion dollar-plus deficits in his administration, and it projects trillion-plus spending deficits for another decade.

The federal government will have borrowed as much during Obama’s four-year term in office as it borrowed during the previous two-century-plus history since the Republic was founded in 1789. Best you reread that last sentence.

We are spending ourselves into an unmanageable crisis!

The budget deficit for Obama's third year in office is $1.645 trillion according to his own budget documents. This is the largest deficit in world history, let alone U.S. history. Federal spending will be 25¢ of every GDP dollar! Historically it’s been 20¢ or less. How much larger must the government share of GDP become before the US economy can be called socialism?

Yet Obama’s Valentine’s gift to Congress was a $3.7 trillion 2012 budget cleverly gimmicked to show a saving of $1.1 trillion over 10 years. The decade’s saving, however, is less than the projected deficit for fiscal 2011. And the “saving’ is only a slight reduction in spending on the programs that Obama spent the first two years of his administration fattening up. One morning talk show host likened it to increasing your child’s weekly allowance from $1 to $4 and then cutting it back to $3 while calling the 25% reduction “painful.” The kid still has two more bucks than he had at the start.

Federal spending is now 37% higher than four years ago, which represents a trillion dollar allowance increase from Uncle Sam – or should I say from you and me, since Uncle Sam doesn’t have any money. With a sleight-of-hand that would make David Copperfield envious, Obama claimed he will lower discretionary spending to the lowest percentage of GDP since the Eisenhower administration. But Obamanomics will push federal spending in 2020 to double that of 2007. Oh, and Obama’s Valentine XOXO? His 2012 spending will drive national debt to more than 102% of GDP, last seen in this country during World War II.

Speaking at the CPAC gathering in Washington last week, Indiana Governor Mitch Daniels (R) warned of a “new red menace” that threatened the nation – although this time it was red ink rather than communism. But somewhat surprisingly, voices that are ideologically aligned with Obama – normally – came out with criticism of the new budget. Obamaphile blogger Andrew Sullivan lamented that others must lead the fight to restrain spending because …

“… this president is too weak, too cautious, too beholden to politics over policy to lead. In this budget, in his refusal to do anything concrete to tackle the looming entitlement debt, in his failure to address the generational injustice, in his blithe indifference to the increasing danger of default, he has betrayed those of us who took him to be a serious president prepared to put the good of the country before his short term political interests.”

Sullivan concluded his Valentine’s Day blog, The Daily Dish, with these words:

“To all those under 30 who worked so hard to get this man elected, know this: he just screwed you over. He thinks you're fools. Either the US will go into default because of Obama's cowardice, or you will be paying far, far more for far, far less because this president has no courage when it counts. He let you down. On the critical issue of America's fiscal crisis, he represents no hope and no change. Just the same old Washington politics he once promised to end.”

Wow! And that’s from a friend and supporter!

Likewise, the Obama-friendly Washington Post characterized him as Punter-in-Chief.

“Having been given the chance, the cover, and the push by the fiscal commission he created to take bold steps to raise revenue and curb entitlement spending, President Obama, in his fiscal 2012 budget proposal, chose instead to duck. To duck, and to mask some of the ducking with the sort of budgetary gimmicks he once derided.”

The same Washington Post editorial included a graph of publicly-held debt as a percentage of GDP. It looked like a hockey stick. The editorial ended …

“If Oklahoma Republican Sen. Tom Coburn could sign on to a deficit-reduction plan that included raising tax revenue, is it too much to ask for such bravery from Mr. Obama? And if Illinois Democratic Sen. Richard Durbin could sign on to a plan that included raising the Social Security retirement age, is it too much to ask for more from Mr. Obama than an airy set of "principles for reform"? Sadly, the answer appears to be yes.”

A new Rasmussen Reports piled on with a national telephone survey this week that found 55% of “Likely US Voters” said the president’s budget proposal doesn’t cut government spending enough. Rasmussen further found that 70% of “Likely US Voters” think they are more willing to make the hard choices needed to reduce federal spending than elected politicians are.

So there you have it. The mood of the country is moving to the fiscal right while Obama’s budget is right out of the land where the unicorns live. After seeing an outline of it, I thought if this budget represented Obama’s roadmap to “Winning the Future,” the theme of his State of the Union address, our country’s best years are behind it.

I had planned to write this week’s blog on how out of touch this president is with fiscal reality, but Obama’s media cheerleaders beat me to it. "I don't need to tell you what I think of the budget: It's disastrous," wrote Atlantic Magazine economics writer and Obama voter, Megan McArdle. "I'm starting to think it's time to panic."

When the budget arrived at the Capitol, Sen. McConnell (R-KY) called it “an unserious budget” and Rep. Paul Ryan (R-WI) called it a “political document which is ‘dead on arrival’ – or should I say,” Ryan added, “‘debt on arrival.’”

Congressional Democrats were delighted that Obama offered no plan for dealing with entitlements. That saved them from fighting another hard reelection campaign in 2012. However, the Tea Party Republicans remembered that they were elected – at least they believe so – on the promise that they would bring down spending. Spending cuts cannot avoid entitlements because entitlement spending, in combination with interest on the national debt, represent two-thirds of all federal spending.

And since the cowardly 111th Congress refused to pass a 2011 budget before the voters kicked them out, the Republicans of the 112th Congress have to create that budget on the fly and fulfill their campaign promise to cut $100 billion in spending. Thankfully the Tea Party House members haven’t been in Washington long enough yet to become jaded, so when their cautious leaders in the Republican caucus came up with $37 billion in spending reductions and thought it was close enough, the Tea Party freshman forced their elders to find more cuts or else forfeit the Tea Party votes. So far they are close to $100 billion.

Later this year, Republicans will turn their attention to a 2012 budget that reduces spending and deficits well beyond Obama’s budget. Since they are opposed to confronting out-of-control spending with large tax increases, which Obama did in his budget, entitlement spending will have to be reduced by Republicans, knowing they will be demagogued for doing so by Democrats in the 2012 election.

Entitlement spending – largely Social Security, Medicare, and Medicaid – are on autopilot, running up the national debt (and therefore its interest payment) every year. Because there aren’t enough taxpayers or available taxable income, the US must therefore borrow 40¢ of every dollar it spends. Even the most reckless spendthrift knows you can’t do that for long.

“They are suckers,” said one senior Democratic congressional aide of the House GOP plans to release detailed proposals to reduce entitlement spending. “They have painted themselves into a corner.” Obama’s reticence to address entitlements is a political trap, Democrats believe, for a Republican Party divided between Tea Party conservatives pushing for major changes to Medicare, Medicaid, and Social Security and a GOP leadership wary of the political peril of tinkering with Americans’ retirement security.

As polls show, the country is deeply frustrated with the $1.6 trillion deficit this year, and voters want spending cut back. But that's not the same as wanting spending cut back in the areas that are important to their interests.

Unless politicians are convinced that voters support cuts in the Medicare benefits that Granny receives, or in the Social Security benefits they pay into and expect to receive, there is little incentive to commit political hara-kiri, as Obama obviously concluded. Washington is many things, but an arena for political courage, it ain’t.

When the Pew Research Center recently surveyed Americans about government spending, they found only 12% wanted to see cuts in Medicare or Social Security spending, and only 6% wanted veterans benefit spending reduced. Those stats are reflected in Obama’s budget, which cuts discretionary spending but not mandatory spending. And since the big bucks are spent in the latter, not the former, his proposed cuts are anemic by default.

“None of the options polls well,” lamented one Republican insider this week.

Still, Republicans predict Obama’s dodging the real cause of budget deficits will come back to haunt him. Since becoming President, he has positioned himself as Washington’s only grown-up – a man who is willing to tackle tough problems and propose unpopular solutions. “Every Republican candidate in 2012 is going to bring this up,” one Republican aide believes, especially since the Republicans must show their hand first and bear the risk of doing so.

Spending reductions are difficult because there is probably no program funded by federal spending which is universally hated by members of Congress. Every program has an advocacy that must be reckoned with when spending is budgeted.

For example, Rep. Jim Clyburn (D-SC), the third ranking leader in the Democrat caucus and the leader of the Congressional black caucus, gave an emotional news conference this week, decrying education cuts proposed by Republicans in their quest to find $100 billion in spending cuts. Districts like the one he represents in Congress have a large number of poor and seven black colleges targeted by the GOP. Clyburn said of the cuts:

“You explain to me how that will provide us the wherewithal to compete. They’ve just gone in with a meat ax chopping stuff out in order to get to some magic number without regard to what this means to the people that we are trying to prepare for the future and what it means to this country if we are going to compete.”

The seven black colleges Clyburn is trying to protect were scheduled to get grants from the Department of Education. Since it was created by Jimmy Carter in 1979, the Department cannot show that it has had any positive impact on the nation’s schools, which are under the supervision of local and state officials. Yet in the 2012 Obama budget, the Education Department received the highest year-over-year percentage increase in budget, 21%, and is set to receive over $77 billion in spending. Republicans have been trying to shut down the department for 30 years.

Then there are Obama’s pet projects in his 2012 budget. He wants to rebuild the nation's roads and spend $53 billion on a high speed rail network in Florida and other states. The newly elected Republican governor of Florida, Rick Scott, says he will reject funds for the project. Scott is the third newly elected Republican governor to turn down money for Obama’s national rail system, joining John Kasich of Ohio and Scott Walker of Wisconsin. Each of the three replaced governors who had lobbied for the funds.

Obama also wants to spend $556 billion on highway and mass transit projects, $46 million to increase EPA spending "to reduce greenhouse gas pollution," and $584 million on research and innovation in “new and emerging environmental sciences.” Of course, Obama refers to this spending euphemistically as “investments,” but neither he nor Congress has ever bothered with a cost/benefit analysis to prove these projects aren’t just more government boondoggles.

However, Obama did issue this threat through a spokesman to Republic deficit hawks this week:

“If the president is presented with a bill that undermines critical priorities or national security through funding levels or restrictions, contains earmarks or curtails the drivers of long-term economic growth and job creation while continuing to burden future generations with deficits, the president will veto the bill.”

Translated: he will force Republicans to shut down the government and hopefully suffer the same consequences when they last did that in 1995, virtually assuring Clinton’s reelection for a second term.

There is something peculiarly reprehensible about a president or member of Congress who puts his or her political future ahead of the good of the country, regardless of party affiliation. The future of the Republic is poorly protected when our elected representatives lack the courage to confront their constituents with the facts that this country is headed for a fiscal train wreck and sacrifices akin to a wartime footing are called for if we are to avoid calamity. Obama’s quiescence in fiscal leadership contradicts the image he beholds in the mirror – a tough-minded chief executive who confronts challenges others avoid. Instead he has taken a political path, persuaded that he is more clever, more persuasive in out-maneuvering his opponents in the political chess game.

“I’m confident we can get Social Security done in the same way that Ronald Reagan and [late Speaker] Tip O’Neill were able to get it done, by parties coming together, making some modest adjustments. I think we can avoid slashing benefits, and I think we can make it stable and stronger for not only this generation but for the next generation.”

Those are the words of a community organizer, not a political leader.