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The Trouble with “Brute Force” Budget Processes

May 4th, 2011 . by economistmom

sledgehammer-flyswatter

As a Concord Coalition issue brief (written by my colleague, Cliff Isenberg) explains, they’re just not very “forceful”:

Process proposals such as caps, commissions, points of order and constitutional amendments are often appealing solutions for politicians because they frequently leave out the specifics of politically difficult decisions necessary to meet the targets. For elected officials, it is far easier to discuss a cap than it is to tell voters that their Social Security or Medicare benefits will be cut or a favorite tax deduction will be eliminated.

As a means of actually reducing deficits, the benefits of process proposals are less clear. In the past, similar proposals have had a mixed track record because they have frequently been poorly designed and weakened with exemptions. For a process proposal to have a meaningful effect on trillion-dollar deficits and our $14 trillion debt, these mistakes of the past must be avoided. An effective budget process proposal should limit exemptions, consider the entire federal budget to be on the table for deficit reduction, include realistic targets, and be accompanied by a bipartisan commitment both to enforce the targets and support the specific spending and revenue policies necessary to meet them.

It’s a lot like our real-world experience with “pay-as-you-go” budget rules, and how we’ve ended up (instead) with “paying-for-hardly-anything-as-we-went” policies.

The sledgehammers turn out to have fly-swatter heads, and the “caps” turn out to be more like cheesecloths.  (If you get what I mean.)

Unfortunately, there’s really no easy way to force the tough choices.

8 Responses to “The Trouble with “Brute Force” Budget Processes”

  1. comment number 1 by: AMTbuff

    Unfortunately, there’s really no easy way to force the tough choices.
    Politicians will do anything to avoid having to make unpopular decisions. Even Ryan’s plan is a metaplan to the extent that it specifies an amount of savings to be achieved without defining in detail just how harsh the austerity will be. The other plans are hopelessly meta, pretending that only other people (e.g. those making more than $250,000) will feel the pain.

    Here’s an idea. Go ahead and pass a law with harsh spending cuts or tax increases that exempt people making under $250,000 . Then print enough money to devalue the dollar by a factor of ten. Everyone but the poor will now be “rich”, defined as having a pretax income over $250,000. Tax their socks off. Problem solved!

  2. comment number 2 by: Gipper

    This is why I’ve been saying that we cannot solve this problem with happy talk. There will be blood. Politically speaking of course.

    Being specific about spending cuts is very, very difficult and harsh. Accepting that these huge cuts will be the price for raising taxes is very hard for some to accept. Neither extreme believes right now that it will have to cave. But they will.

    The Debt Ceiling vote will be a clarifying event. Financial Markets will rejoice when Republicans hold fast and refuse to raise the debt ceiling until Democrats accept harsh spending cuts. I think that is why bond yields have not increase very much. Markets expect that the politicians are going to get real.

    The smart money also understands that with plenty of tax revenues coming in that there is more than enough money to pay interest and principal on the debt. Only stupid and partisan journalists actually believe the crap emanating from Geithner and Goolsbee regarding threats to our financial markets with a refusal to raise the debt ceiling.

    The only threat is that the Treasury desks at Goldman, Morgan Stanley, and the rest of Wall Street firms will be a bit quiet for a while. That could affect the Manhattan lunch and dinner business, but I couldn’t care less. Do you?

  3. comment number 3 by: Vivian Darkbloom

    AMTbuff,

    Perhaps you were being facetious, but your idea is not new. It is often said that inflation is not a solution to our debt problem because a lot of that debt is short-term and inflation would merely result in increased interest rates on most Tresuries, as well as increased costs on entitlements to keep them in line with inflation. The reality is that inflation *can* be used to reduce the real debt, and politicians of all stripes know this. Inflation can help increase real taxes and reduce real spending at the same time.

    Reagan, of course, recognized the effect of “bracket creep” and answered by indexing tax rates. But, , it appears that the current administration is back to the old tricks and hopes to break their promise not to raise taxes on the middle class by not indexing many of their various tax proposals. For example, the Cadillac tax in PPACA is designed to hit only “high value” health plans, but the threshold for taxation of those plans is not indexed. Also, Ryan’s plan increases health care benefits by CPI-U, not actual rises in health care costs. Small but steady changes to the CPI measure for social security (and similar programs such as public pensions) can reap enormous real spending cuts in the future. Keep your eye on this technique in future proposals. These techniques allow politicians to both raise real taxes and lower real spending without having the public aware of what is going on. And, once this is set in place, increases in taxes and reduction in spending are automatic and the higher the inflation rate, the more effective the technique is. Significant inflation over, say, a ten year budget period can have a huge effect on revenue projections.

    I would be interested if there is any literature available on the various revenue provisions that are not indexed for inflation. If such a study has never been done, it would be a good project for someone. Another that comes immediately to mind is the restriction on the mortgage interest deduction to the first $1 million of mortgage debt. While we’ve recently suffered quite a drop in housing prices, inflation has, I’m sure, already significantly diluted the value of the mortgage interest deduction. Also, inflation increases the government’s tax take on capital gains. The list is long…

  4. comment number 4 by: AMTbuff

    The Section 121 exclusion of gain on sale of a principal residence has not been indexed since it was enacted 14 years ago. Its value was gradually halved until the real estate crash reversed some of the erosion.

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  6. comment number 6 by: PAYGO

    You neglect to mention that the PAYGO rules of the 1990s were adhered to until 2001.

  7. comment number 7 by: AMTbuff

    VD, here are some other non-indexed provisions.

    The thresholds for taxability for SS benefits were stated at the time (1993) to operate as a gradual phase-in of 85% taxability for everyone through non-indexation.

    The child tax credit phaseout thresholds have never been indexed, so it is available to fewer and fewer families.

    The AGI limit for IRA contributions was not indexed until 2 years ago.

    The AMT brackets are not indexed and have not changed since 1993. Congress regularly increases the AMT exemption but never touches the brackets. Therefore the AMT affects more and more people as their gross incomes climb above $175k unless the exemption is increased faster than inflation.

    The $3k capital loss limitation dates from the 1960’s and has been absurdly devalued.

    California has a 1$ extra tax on incomes over $1M which is not indexed and that will eventually hit the non-rich.

  8. comment number 8 by: Vivian Darkbloom

    AMTbuff,

    Given your monniker, I was surprised you didn’t mention the AMT until now. While the AMT exeption amount is not automatically indexed for inflation, Congress has, as you indicate, sporadically increased it. The original exemption amount for married persons was $40,000 in 1986. In 2011, I believe it will be $74,450. A quick check of the CPI inflator suggests that the $40,000 should be $81,557 today. So, it has not quite kept up and this one item has a pretty significant effect on tax revenues, I think.

    Again, the point is that inflation has a tremendous effect on how much we are taxed and how much government spends, in real terms, even though in and of itself, it is not enough to solve the debt problem. It can work on both ends. On the taxing side, failure to index various provisions to inflation results in automatic tax increases. Entitlement programs, public pensions and the like seem to be more consistently indexed to inflation than the tax code is. Thus, I think there is a natural bias in the budget system to increase taxes while holding spending at least constant. Of course, both depend on how inflation is measured and whether the inflationary measure is reflective of reality. Understating real inflation should have the effect of increasing revenue and reducing spending. Those people who are in charge of creating the inflation indices wield a tremendous amount of power over our budget.