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Balancing the Budget

I certainly agree with Seth Mandel that the federal budget can never be brought under control without entitlement reform. Entitlements are well over half the budget. And the dates when each program will reach insolvency are all known. Those dates are not that far away, some less than 10 years.

He says there are only two ways to get to a balanced budget. One is a balanced budget amendment to the Constitution that would force the government to spend within its means and the other is for the president and Congress to man up and just live within the government’s means, however inconvenient that will be politically.

Unfortunately, neither of those will do it. In the latter case, human nature simply makes it impossible. Politicians, like everyone else, are motivated by self-interest and spending money is more likely to further that self-interest than fiscal restraint. Fiscal restraint is a long-term benefit, benefiting the population in general. Spending is a short-term benefit, usually benefiting a specific group, who will reward the politician with votes and campaign contributions. That means there is always a tide pushing in the direction of more spending. And with every politician’s short-term self-interest in tomorrow’s headline and the next election, that tide will, at least collectively, not be fought. And, of course, log-rolling is how things are done in Congress: You vote for my bridge to nowhere and I’ll vote for your useless airport.

Nor can a balanced budget amendment work as long as those who spend the money (members of Congress and the president) get to decide how to keep the books. As Seth points out, most states have balanced budget requirements in their constitutions and state governments often make end-runs around them in order to spend without having to raise taxes. Just this week, the SEC accused Illinois (to be sure, the poster child of state budgetary malfeasance) of securities fraud in regard to the information it gave investors about the bonds it issued to fund its pension system. State pension funds are often underfunded by the simple expedient of predicting rates of return that are unlikely to be achieved. This allows states to contribute less to those funds in the here and now, while the consequences are only apparent in the long term.

So what to do? If a balanced budget amendment won’t work as long as politicians have the choice of either balancing the budget or cooking the books to make it appear balanced, an amendment making it impossible to cook the books would. Such an amendment (or act of Congress) could set up an independent board, modeled on the Federal Reserve (which keeps the power to print money out of the hands of politicians). This board would have the power to establish the rules by which federal accounting is done, with a mandate to make the federal books honest, transparent, and complete. Corporations can’t make the rules by which they keep their books; why should government have that power? More, it would take over most of the functions of the OMB and the CBO, which are the creatures of the White House and Congress respectively. An independent agency should “score” legislation.

Second, make the president once more a major player in the budget negotiations.  The president is the only person in Washington whose political interests are the same as the interests of the country as a whole. The 535 members of Congress are more concerned with bringing home the bacon to their state or district, with its immediate political benefit to themselves, than in balancing the budget, however much lip service they give the latter.

The Budget Control Act of 1974 was perhaps the most misnamed piece of legislation ever to be signed into law, as it caused the budget to immediately and permanently spin out of control. A major reason is that it made the president a political eunuch in budgetary matters. He prepares a budget (well, the law requires him to, but Obama’s 2014 budget is a month and a half late and counting) but it is always more or less dead on arrival in Congress. And beyond that, his only budgetary weapon is to veto one or more of the 13 appropriations bills that fund the discretionary part of the budget, a very powerful but blunt weapon indeed. (It’s no weapon at all, of course, when there are no appropriations bills, only a continuing resolution to fund the entire discretionary budget, as has been the case in recent years.)

The Budget Control Act removed the president’s power to “impound” funds, i.e. refuse to spend them. Restoring that power or, better yet, giving him a line-item veto that would pass constitutional muster, would give him a powerful tool in budget negotiations (“I’ll give you your bridge to nowhere if you’re with me on entitlement reform”). Further, giving the president the power to limit overall spending, subject to a congressional override, would further strengthen his hand. None of this would be easy to achieve, as the very people who would have to pass the necessary amendments and acts would be the same people whose power would be greatly constrained by them. And, as James Madison explained, “Men love power.” Certainly as long as the economically illiterate and politics-obsessed Washington press corps fails to do its job, not much will happen. At least until the marketplace takes control and sends the cost of federal borrowing up to Greek levels.



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