In the Nation's Interest

When Are Spending Cuts Real?

By Joseph Minarik

Over the last 72 hours, former Florida Governor Jeb Bush has done a messaging tap dance.  First he made comments about the political behavior of former President Ronald Reagan and also his own father, former President George H.W. Bush.  But then Governor Bush made a more-current substantive statement: that he would accept a deficit-reduction deal that included ten dollars of spending cuts for every one dollar of tax increases.

For that, he was immediately castigated by members of his own party.  Among them, Republican activist Grover Norquist criticized Governor Bush by saying that “…he thinks he’s sophisticated by saying that he’d take a 10:1 promise. He doesn’t understand — he’s just agreed to walk down the same alley his dad did with the same gang. And he thinks he’s smart. You walk down that alley, you don’t come out. You certainly don’t come out with 2:1 or 10:1.” Norquist’s organization, Americans for Tax Reform, posted a statement saying that “When bipartisan deals are struck promising to cut spending and raise taxes, the spending cuts don’t materialize but the tax hikes do.”

Set aside for the moment the question of whether the federal government today is too large or too small.  (Disclosure:  The Committee for Economic Development has stated that solving the current debt problem will require both reductions of spending, especially of healthcare costs in the long run, and increased taxes.)  Focus instead on the narrower but nonetheless complex question:  What does it mean to cut federal government spending?

Engage in the following thought experiment:  Imagine that this or the next Congress negotiates a draft bipartisan deficit reduction bill that both cuts spending and increases taxes.  But then Grover Norquist and others prevail on the Congress to delete the sections of the bill that increase revenues, and so the remaining bill now provides 100 percent for spending cuts, and not at all for revenue increases.  According to Norquist, what used to be a bill with phony spending cuts that would never materialize suddenly has become a solid reduction in the size of government – even though the provisions that reduced spending have not changed at all.

Really?

Arguably, what we have is not a dispute over deficit reduction, or even over the size of government.  Rather, we have a basic misunderstanding of the operations of government, and the legislative process that funds it.

Start with the fundamentals.  We live in a (thankfully) growing nation.  We have a growing population of children to educate, from grades Pre-K through Egghead.  We have a growing population of elderly, who have contributed toward their own growing number of payments of benefits from Social Security and Medicare (however those benefits may be restructured in the coming years).  We have a growing population of automobile drivers, on a growing network of roads and highways – when they are not commuting on a growing infrastructure of public transit.  Our population demands growing flows of water that needs purification.  We eat growing volumes of food that must be inspected for safety.  The list could go on and on.

So long as government does what the taxpayers expect it to do, federal spending (on both its own obligations and aid to states and localities) will increase in dollar terms, and in inflation-adjusted dollar terms.  Spending can and hopefully will decline for a finite period when the economic recovery takes hold – reversing the temporary run-up that both was caused by and responded to the weak economy of the last five years.  This decline will be greater if policymakers can find efficiencies in government operations, which they should seek.  But once those adjustments have their effect, the trendline in dollars will be up – and that should surprise no one.

Over the long haul, the pace of government spending growth will be irregular, and will be driven by economic events.  When the economy inevitably falls into future recessions, spending will increase more rapidly, as government provides unemployment benefits and fills in the gaps in healthcare coverage.  Those increases in spending will subside and be partially reversed in the subsequent economic recoveries.  Still, over the long term, and so long as the government continues to execute its core functions such as those enumerated above, federal spending will grow at a steady pace.  That pace must be controlled so that spending, even as it grows in inflation-adjusted dollar terms, does not grow unsustainably faster than the rate of growth of the economy (the gross domestic product, or GDP).

The Americans for Tax Reform statement on this issue, cited above, totally misses this reality.  In particular, it compares actual spending after the 1990 bipartisan deficit reduction agreement to a spending “baseline” constructed at the time of the agreement – ignoring that at the time when the agreement was being enacted, the economy already was falling into an unanticipated recession which by itself drove spending significantly higher than had been forecast.  Gump happens, and it is unproductive to pretend that it does not.

There is another potential argument that combined spending-and-tax deficit reduction deals do not work: that the budget process is loaded against spending cuts and for tax increases.  Tax increases, this argument would go, are put into the law and then are effective immediately and for all time.  In contrast, entitlements are entitlements, and those entitled might claim more than would be inferred on the basis of any enacted entitlement cuts.  And cuts in appropriated spending are mere promises for the future.

It is true that tax law changes generally (but certainly not always) are enacted on a permanent basis.  But so are entitlement law reductions.  If the economy is weak, entitlement spending will go up relative to projections, and so past entitlement cuts will appear to have fallen short of their goals.  However, if the economy is weak, tax revenues will fall short of their projected levels, and so past tax increases will appear to have failed as well.  After the 1990 budget deal, which Americans for Tax Reform criticized for failing to deliver on spending cuts, the Congressional Budget Office projected 1991 tax revenues at $1.094 trillion.  Actual revenues came in at $1.055 trillion, or $39 billion less.  The estimated additional taxes to be collected solely because of the 1990 legislation had been $18 billion.  So by the same reasoning that Americans for Tax Reform uses to say that the 1990 law spending cuts did not materialize, one could argue that the tax increases did not materialize, either.  In both cases, the cause was the weakness of the economy, not any failure of the Congress or the White House to deliver on either spending cuts or tax increases.

And on the complaint that cuts in appropriated spending are mere promises, remember that appropriations are annual.  They always have been.  The one-year timeframe for appropriations provides the opportunity for annual oversight and policy change, which opponents of government certainly would not relinquish.  Therefore, a promise as of year one of restraint in annual appropriations in year two necessarily can be nothing more than just that: a promise.  However, the track record of the usual device for enforcing those promises – future-year caps in annual appropriations – has been good; the annual appropriations caps enacted in 1993 are widely acknowledged to have contributed mightily to the march of the budget from deficit to surplus over that decade.

But all of that aside, these weaknesses of the budget process that are alleged to apply to mixed spending-cut and tax-increase legislation in fact beset all laws that cut spending.  For those who seek deficit reduction 100 percent through spending cuts, these realities are the same.  They are not changed whether budget legislation includes, or does not include, revenue increases.  Thus, the argument that true deficit reduction cannot include a dime of revenue increases is hopelessly naïve with respect to legislative realities.

In sum, we live in a growing nation during uncertain times. We need spending reduction (and revenue increases).  As a part of the deficit-reduction process, our policymakers will need to seek efficiencies in the operations of government.  But over long periods of time, federal spending will grow more or less in step with the economy.  (To achieve “less,” we must succeed in healthcare reform.)  And during economic downturns, spending will tend to be higher than projections, just as revenue will tend to be lower.  These unavoidable realities do not mean that efforts at spending reduction accompanied by revenue increases are fraudulent, or otherwise doomed to failure.  They apply to all attempts to cut spending, whether they include revenue increases or not.

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