America's Fiscal Constitution (61 page)

F
EDERAL
L
EADERSHIP AT A
C
ROSSROADS

By 2014 the consequences of rising debt had exposed the fragility of the debt-financed achievements of federal elected officials in each party.

Republican-sponsored tax reductions did not reduce the size of the federal government. Even apart from outlays occasioned by wars and recession, outlays for the base defense budget and medical programs had climbed sharply. After the 2012 election, Republican congressional leaders agreed not to block the scheduled rise in the tax rate applicable to the highest tax bracket. They had no politically viable alternative. Expenditures for national security—the single category of spending most valued by many conservatives—faced massive cuts as a result of the Budget Control Act of 2011, which Republican leaders had agreed to as a condition for raising the debt ceiling.

Democratic accomplishments also rested on thin ice, as the rising cost of medical services began crowding out other domestic spending. The Budget Control Act of 2011, negotiated by a Democratic president with
strong progressive credentials, gradually dropped the share of nonmedical domestic federal funds spending to its lowest level in fifty years. Rising medical and interest expenses threatened future federal commitments to education, job training, nutrition, medical research, affordable housing, urban transit, and renewable energy. Recovery from the Great Recession of 2008 and withdrawal from two wars made it more difficult to hide the use of debt to pay for routine expenses. By 2014, however, incumbent leaders in each party found it hard to act decisively to balance the budget without violating campaign pledges.

Most voters and elected officials profess agreement with the ideal of balancing the budget. Federal candidates can, however, feel pressured by some influential activists and intellectuals—exemplified by Grover Norquist on the right and Paul Krugman on the left—who question the importance of that objective. Norquist and Krugman consider the focus on annual federal borrowing to be a distraction from what they regard as the more significant fight over the size and responsibilities of the federal government. In general, Norquist believes that spending should be reduced to the level of current tax revenues, while Krugman believes that tax revenues should rise to the level of current spending minus newly monetized debt. Norquist and Krugman treat the drive for balanced budgets as pressure to strike what each would consider an unacceptable compromise.

A group of business leaders have organized the Committee for a Responsible Federal Budget to provide some counterweight to the voices who oppose compromises designed to reduce borrowing. The gap between federal revenues and expenditures is so great, however, that even the committee embraced budget plans that allow annual borrowing for routine expenses. The committee seeks to limit the growth of debt to less than the growth in nominal national income. So, for example, if nominal income (not adjusted for inflation) is estimated to grow at 4 percent a year, debt could grow at 3 percent a year. Since the federal government will certainly borrow additional funds during future downturns or wars, a budget rule that condones the use of debt—rather than tax revenues—for recurring expenses runs the risk of debt growing faster than projected. Chronic borrowing also undermines the Jeffersonian principle of confining government to the price that the public is willing to pay in taxes.

PART VI

RESTORING THE TRADITION

19

R
EVIVING
T
RADITIONAL
B
UDGET
P
RACTICES

M
ODERN
A
PPLICATION OF
T
RADITIONAL
P
RACTICES

Ending the addiction to debt takes more than political courage. Four pillars of the American Fiscal Tradition—clear accounting, “pay as you go” budget planning, trust funds financed entirely with dedicated revenues, and explicit congressional approval of debt for specific amounts and purposes—once curbed the temptation to borrow. These practices helped federal leaders reduce debt for a minimum of ten out of eleven straight years after each of the nation’s first four peaks in debt. After the fifth debt spike (in 1945), traditional budget practices helped steadily reduce the burden of debt for three decades. Modern variations of time-tested practices could help federal leaders respond to the nation’s current debt crisis.

Reform 1: A Separate, Tax-Financed Federal Funds Budget

Driving a car without a dashboard and transparent windshield is dangerous, and so is budget planning without a clear view of the relationship between annual spending and revenues. Thomas Jefferson insisted that federal budgets be “clear and intelligible” to “any man of any mind.”
¹
Today federal accounting often disguises the level of borrowing, the use of borrowed funds, and the actual burden of existing debt. For this reason, the president should submit, and Congress should be required to vote on, a federal
funds budget—apart from a trust fund budget—with spending limited to estimated revenues. A separate trust fund budget would encompass all the spending supported entirely by dedicated trust fund revenues. Any spending to be funded with debt should be excluded from the trust fund budget.

A tax-financed budget would help minimize distracting debates—such as those in the 1980s and after 2000—about what borrowed money paid for. Separation of federal funds and trust funds budgets would eliminate complexities of actuarial accounting from much of the federal funds budget and reduce the temptation of federal officials to count social insurance revenues as income without accruing a related liability. Use of a separate trust funds budget is hardly radical; it conforms to the procedure in place before fiscal year 1969.

A tax-financed federal funds budget would also highlight the cost of debt service and, in doing so, serve as a reminder that debt is not free. Citizens today have difficulty even finding the federal interest expense payable annually from federal funds revenues. For example, in fiscal year 2011, the federal funds budget paid $418 billion in net interest, an amount $188 billion higher than the amount shown in the unified budget.
²
A tax-financed budget would also make the consequences of tax cuts more visible by explicitly linking the relationship between spending and taxes. No one likes taxes, and the only reason to tax is to pay for public spending.

Even though enactment of a separate tax-financed budget would not preclude a separate authorization of debt, it would strengthen the political and management skills required to link spending and tax policies. Those skills have atrophied.

Even good faith revenue estimates will, of course, sometimes miss the mark. To reduce this risk, revenue estimates should be adjusted more frequently than twice a year, the current practice. Large corporations adjust their internal revenue forecasts at least monthly and announce any changes to their estimates quarterly.

Reform 2: Tax Financing of Debt Service and Essential Defense

The tax-financed budget should pay for all interest expenses and at least a basic level of national defense. Debt service and some level of national security are federal functions that cannot simply be performed by state and local governments. A requirement that tax revenues be reserved to pay for
interest and some level of defense should remove the temptation to fund other items first and then claim that the United States must borrow to pay its creditors or defend itself. A tax-financed federal funds budget that preserves essential federal functions would make the legal debt ceiling a far more realistic tool for enforcing fiscal discipline.

The president and Congress would have to define the appropriate scope of security-related activities worth funding with tax dollars. That funding is likely to encompass programs within the Department of Defense, nuclear weapons programs in the Department of Energy, and various intelligence activities. The president and Congress would likely give priority to the use of taxes for defense-related functions such as homeland security.
³

Reform 3: Votes on Debt-Financed Appropriations

Congressional procedures now divorce votes on spending from votes on how to pay for that spending. Congress considers amendments to the debt ceiling only
after
it has voted to spend more than available tax revenues. As a result, debates on the debt ceiling have become a form of bad political theater, a bizarre combination of tragedy and farce.

Votes to authorize debt should accompany votes to spend any amount greater than available revenue. Congress should require separate record votes on the portion of any appropriation expected to be financed with debt. Citizens would then be able to determine the amount and purposes of debt voted for by each member of Congress. The total of debts approved to pay for all appropriations would, in essence, constitute a more visible debt-financed budget.

Congress constrained debt more effectively when it voted to incur debt only for specified purposes. Before World War I, each bond issue could be traced to a defined purpose, such as financing the Civil War, the Spanish-American War, and the Panama Canal. Congress established an overall ceiling on debt used to fund World War I, and the level of that provided a context for the amount of ceiling for debt incurred during the Great Depression. Congress raised the limit on authorized debt for the clear purpose of financing World War II. The final wartime debt ceiling, $300 billion, was never exceeded until after the 1961 Berlin Crisis.
⁴
In contrast, after 2000 it has been far more difficult to identify the rationale for new debt.

The use of a total debt ceiling unrelated to congressional appropriations is misleading as well as ineffective. To understand why, consider the
fact that the executive branch could not borrow at all if Congress repealed what is commonly called a “ceiling.” Some members of Congress would prefer to characterize votes on the debt ceiling as a fight with the president, and presidents are accustomed to asking Congress to authorize more debt. In fact, the executive branch does not have an independent constitutional power to borrow a dime, and only money Congress votes to spend can be paid for with debt.

A legal debt limit established apart from specific appropriations breeds cynicism and hypocrisy, since many members of Congress have voted against higher debt ceilings after first voting for a level of spending greater than the revenues produced by their tax legislation.

The House and Senate each vote annually on about thirteen appropriations bills—legislation funding various functions of the federal government—and again for related appropriations following compromises in conference committees. Every session, subcommittees of the Appropriation Committee in the House and Senate prepare the details of those bills within the allocated spending ceilings or “marks.” A tax-financed federal funds budget could be implemented by giving each appropriations subcommittee two ceilings, one for an amount financed with tax revenue and another for any use of debt.

Separate debt-financed and tax-financed appropriations would give members of Congress the ability to vote only to spend an amount limited to estimated tax revenues. A president could then approve tax-financed spending for some purpose while vetoing debt-financed spending. Presidents and members of Congress should be allowed to explain that they support a particular program, but only to the extent that it can be funded by existing or new tax revenues.

Many incumbents fear political attacks if they vote against any annual appropriations bill because they object to the method of financing rather than the object of the appropriation. So, for example, a member of Congress who strongly supports both agricultural programs and a balanced budget has difficulty explaining to constituents today why he or she voted against an agricultural appropriation that would be funded with an unspecified amount of debt. Members of Congress ought to be given the opportunity to vote only for tax-funded appropriations.