In the Nation's Interest

“Are You Gonna Get Any Better, Or Is This It?”

Attributed to the late Earl Weaver
Former manager, Baltimore Orioles

By Joseph Minarik

So the nation has addressed its mounting public debt problem by failing to take explicit action, and therefore allowing an automatic “sequester” of spending to take effect.  The sequester is a mindless across-the-board cut, reducing defense and non-defense spending alike, and the highest and the lowest public priorities equally.  And for all of the pain it will cause, it is far insufficient to solve the debt problem.  It is the proverbial basketball player who made up for his lack of size with his lack of speed.

The House and the Senate have passed budget resolutions that are trillions apart, literally and figuratively, and they cannot agree to go to conference to reconcile the two.  The House Speaker says that he has been jilted one too many times, and will not meet with the President privately.  The President has taken groups of Republican Senators out for very nice dinners, and even has picked up the check.  (Personal deficit spending?)  But those Republican Senators say that they cannot cut a deal without their Minority Leader, who so far apparently prefers to eat at home.  And there are no signs of any communication between the dining Republican Senators and their House Majority counterparts.

So in those immortal words reportedly shouted at the tips of innumerable umpires’ noses by the late Earl Weaver, “Are you gonna get any better, or is this it?”  Apparently, Weaver never reached a very positive opinion of the quality of major league umpiring, and there is precious little evidence to inspire much greater confidence in the workings of Washington these days.

On first principles, no one had great fondness for the sequester.  Republicans by and large could not abide the defense cuts, and Democrats felt the same about the domestic cuts.  But Democrats, including the President, concluded that the defense cuts could be used as bargaining leverage, and some even embraced the prospect of the sequester as the only way they could squeeze the Pentagon budget.

But the tables appear to have turned.  Enough Republicans have embraced the defense cuts to move the balance in their caucus; and apparently most if not all Republicans enjoy watching the Democrats squirm at the mechanistic reductions on the domestic side (including small cuts in entitlement programs, which are seldom mentioned but have real consequences).  It is easy to blame the White House’s management for any pain and suffering that eventuates, and if an intolerable problem emerges (like air traffic control or food inspection), the Republican House can easily pass a rifle-shot bill to fix it.  If the Democratic Senate were to refuse to move such a bill along, it would have to accept direct responsibility for the problem.  So while some people have expected the sequester to arouse broad-based opposition, that does not appear imminent, or perhaps even likely.

The true harm of the sequester will come in neglect of slower-appearing, longer-term priorities – investment, if you will.  That will include the maintenance of the effectiveness of government as well as more-frequently-cited purposes such as research, education and infrastructure.  In other words, the sequester will favor (in relative terms, at least) the short term over the long term – an ordering of priorities that some would say has become so widely accepted in this country that no one would notice.

So if the sequester is not going to force action on the budget, what will?  Apparently not the budget deficit itself.  Predictably, reports of improvement in the budget, based largely on the new budget outlook from the Congressional Budget Office (CBO), have cooled the fires of anxiety palpably.

Some of the improvement in the budget has come from the modest economic recovery.  Revenues were way down from the historical trend, and have just begun to turn around; but that is enough to make a significant dent in the deficit.  Outlays were up because of the downturn and the stimulus bill, and they have begun to come back to earth, too.

But a lot of the progress on the outlay side has come from a slowdown in healthcare cost growth.  It would be wonderful if this growth slowdown proved to be permanent.  And many policymakers and analysts wish, hope, or believe that it will be.  Advocates of the Patient Protection and Affordable Care Act of 2010 would like to attribute the cost improvement to the new law.  But it would seem too soon for any meaningful payoff, even if you believe deeply in the new law; the insurance exchanges do not begin functioning until next year, and those provisions that already have taken effect would seem unlikely to reduce costs.  The most enthusiastic fans of our private healthcare delivery system would be gratified if cost pressures had led to meaningful process improvement; but that improvement is as hard to identify as is the potential motivation for providers who still profit from an increased volume of services to deliver less.

The clearest potential cause of the healthcare cost slowdown is the economic slowdown.  A consumer who fears that he or she cannot afford to pay for a physician’s recommended treatment is less likely to seek out that physician in the first place.  This certainly characterized many of the unemployed and underemployed in the recent recession.  It still characterizes many of the elderly population, whose spendable incomes are reduced by the just-above-sea-level interest rates that they earn on their savings.  Even among those elderly who have not yet exhausted their savings, there is great concern that dipping into their savings principal for expenses that exceed their interest earnings will impoverish them in short order.  Thus, it is likely that the cost relief enjoyed by the federal government in Medicare comes at least in part from the reluctance of some of the elderly to seek medical care.  The prospect of any such savings to continue in the long term is slim at best.

The weakness in the case for the effect of the economic slowdown is that the healthcare cost slowdown appears to pre-date the recession, at least somewhat.  A strength in the case for at least some role for the economy is that past economic downturns have had similar effects.

In other words, the statutory prudent man would not bet the farm that the healthcare cost slowdown would bail us out of our long-term budgetary woes.  But don’t bet the farm that Washington policymakers won’t bet the farm.

In the middle 1980s, a similar period of deficit and debt angst, budget wonks (though I don’t believe that term had yet been invented) would cite two closely inter-related behavioral tendencies.  The budget deficit was so large that it made decision-makers conclude that it was insuperable; and many policymakers seemed to take the attitude that, if you could not truly solve the problem, you might just as well ignore it – or worse still, have a party.  Also, like today, any signs of good news were quickly scaled up to eternal salvation by many – especially those whose policy choices happened to be in effect at the time.

Rudolph G. Penner, then CBO Director, echoed deep memories of Mr. John O’Connor (God rest his soul), teacher of my first-year-of-high-school algebra class, who would urge his students who were stunned into inaction by a seemingly impossibly complex equation to “do what you can do” to simplify it.  And as we used the equivalences at hand to simplify the terms step by step, lo and behold, the underlying structure would become clear.  Rudy (who most likely never met Mr. O’Connor, though I am sure they would have gotten along) on at least one occasion testified before a congressional committee that anything they could do to reduce the deficit would thereby reduce the accumulated debt, which would reduce debt-service costs in perpetuity; so he urged them to “do what you can do” even if they could not demonstrably eliminate the entire budget problem in one swell foop.

In fact, the “do what you can do” attitude was important in the 1993 deficit-reduction program of the Clinton Administration.  That program might have garnered better reviews at the time if it could have been demonstrated by itself to eliminate the deficit.  It couldn’t.  It was estimated to take a big chunk out of the deficit, and turn the debt-to-GDP ratio down for a few years, but afterward, both were projected to grow again.  It was a struggle to get the Congress to do even that much heavy lifting.  However, though subsequent economic growth exceeded expectations, interest rates remained lower than forecast because of the expectation of continued fiscal responsibility; and as a result, even before the Congress took any further perceptible action, the budget was already demonstrably (to me, at least; I turned out to be right, and won several six-packs of Sam Adams in bets as a result) on the road to balance.

But that simple “do-what-you-can-do” wisdom has been lost, and today the willingness to sacrifice to ameliorate – even if we cannot eliminate – a serious problem seems to be gone.  And now, as at times in the 1980s, temporary and insufficient improvement in the budget has aroused complacency.  The CBO projects that the deficit will be lower this year than last and will fall in dollar terms through 2015, and will remain low enough that the ratio of the public debt to the GDP will fall through 2018.  That apparently seems to some to be enough reason to declare victory, even though CBO makes clear that it does not anticipate the progress to continue.

So the mounting pain of the sequester will not drive action on the budget, and the debt problem itself is in apparent (but likely temporary) remission.  Then what remains?  Sometime in September (the Bipartisan Policy Center is the best source for projections of this ever-changing deadline), the Treasury will once again confront the debt limit; and at the end of September, the fiscal year will end, and all of the agency appropriations will expire.  Some would call these “action-forcing events;” others might believe “scheduled train wrecks” to be more accurate.

Just what these two deadlines will yield is unknown.  Their effects are not identical.  And the appropriations deadline is different from the sequester, although both affect the day-to-day operations of federal agencies.  The sequester squeezes activity by a small increment (on top of larger cuts imposed in a prior law); but an expiration of appropriations – a “government shutdown” – would choke off activity entirely.

In the mid-1990s, the perception was that the shutdown periods caused serious disruption and brought the public’s ire down on the Congress, which was perceived to have caused them.  (History has been revisited by some in the years since.)  Some argue today that the Congress will not want to fall into the same PR pit, but many House Members insist that they will exact a high price to keep the government open.  Some outside observers have said in recent appropriations showdowns that the House’s rhetoric almost required some period of shutdown to save face and avoid a perception that it had been bluffing all along.  Others would say today that extremist constituencies back home will throw out their conservative Members in favor of even-more-extreme conservatives if all of the bluster is not backed up by action.

In a shutdown, federal government personnel are prohibited by law from going to work to pay the legitimate claims of the government’s small-business contractors, employees, and so on.  But in an instance of the second “action-forcing event” – a hard Treasury collision with the debt limit – the federal government personnel will be on the job, but they will not have the money to pay the small-business contractors and employees – or the federal government’s creditors.  The House has considered legislation to “prioritize” debt service and repayment over other claims, and the advocates of such legislation argue that the dreaded term “default” applies only to failure to service and redeem the debt.  There are passionate differences of opinion over whether “default” would occur only in the failure to redeem a Chinese-government-owned bond, and not in missing a paycheck for a U.S. serviceman or servicewoman in harm’s way.  But more important than the semantic issue is the economic consequence.  Would the financial markets erupt if the Treasury failed to service its debt, but yawn if it failed to pay its other legitimate claimants?  I don’t know.  And I don’t want to know – because if the consequences of the latter instance proved tragic, it would be too late to put the toothpaste back in the tube.  And I suspect that the statutory “prudent man” would agree with me.

What will the Congress and the President do about these two pending “action-forcing events?”  Don’t expect action – certainly not before the Congress’s August recess, at least if the current estimates of when the debt limit actually will bind after the Treasury Secretary’s now-routine “extraordinary measures” are exhausted.  And even then, frankly, no one knows.  A government shutdown on October 1 would not be a surprise; the ultimate consequence would be a further flogging of the “discretionary spending” dead horse, even though there is great doubt that the current ten-year statutory limits on the annual appropriations can be met for even one or two more years.  Far more consequential would be a hard collision with the debt limit, whether one would prefer to call it a “default” or not.  The President has said that after the debacle the last time the Treasury approached the limit in August of 2011, he considers the issue non-negotiable.  At the same time, some in the Congress say that they are willing to drive the nation into non-payment of its non-debt-related-obligations if their policy demands are not met.  Discussion of the endgames on both of these deadlines can go on until September – which in today’s Washington, with its modest standards of prudence, means that it will.

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