- Neither plan balances the budget soon enough
- Both ignore interest on the national debt
Practically Speaking, Neither Plan Can Pass
Balancing the budget 20 or 30 years from now is not acceptable. It is hard to enough to plan 5 years ahead, and it's downright silly to think one can balance a budget 20-30 years ahead.
Obama's plan is far worse than Ryan's, but practically speaking, neither works. Moreover, politically speaking, neither can pass.
Need to Set Goals
To accomplish anything we need to set a goal. I proposed such a goal in Simple Proposal: Balance the budget by 2022 come hell or high water
Holding Someone Accountable
One problem with every proposal to date, including mine, is that no one is accountable. By that I mean there is no enforcement mechanism.
Realistically, there never can be a guaranteed enforcement mechanism because any agreements or legislation passed by this Congress does can be undone by the next Congress.
However, if both sides share the pain equally in any resolution, it will be much harder for one side to game the system or refuse to cooperate.
Budget Projections From Peterson-Pew Commission
To rectify the shortcoming I mentioned above, the Peterson-Pew Commission on Budget Reform has proposed a trigger enforcement mechanisms to Get Back in the Black.
I do not agree with all of their proposals. Indeed their target of cutting $4 trillion over 10 years is certainly wimpy. It will not balance the budget soon enough, if indeed ever.
Nonetheless, this budget projection in their 48 page PDF caught my eye.
Spending and Revenues 1980-2080
click on chart for sharper image
I sent an email to the Peterson-Pew Commission because I would like to know just what interest rates they have factored in to create that chart.
Whatever the rates are, note that interest on the national debt will eventually become the biggest fiscal issue.
Projection Silliness
Mathematically speaking, if projecting 30 years ahead is silliness, what does that say about projecting 70 years ahead?
Reflect back to 2000. What happened to the budget surplus that was supposed to last a decade? Greenspan had the audacity to agree with that projection. Did the surplus last six months or was it imaginary to begin with? I vote the latter.
Looking ahead, interest on the national debt will continue to rise until debt levels shrink.
Fed's Exit Plan in Question
How likely is it that interest rates will drop? Short-term rates can't. Unfortunately, the Fed is not locking in low long-term rates now. Instead, the Fed is buying treasuries rather than selling them in a foolish attempt to force down rates. That plan has failed, yet the Fed persists.
Supposedly the Fed has an "exit plan", but whatever that plan is, long-term rates are likely to rise. When they rise, so will interest on the national debt.
Failed Budget Process
From the Peterson-Pew report ....
A budget process can only be judged by its results. The current process has allowed the federal government to commit to spending far more than the revenues it will collect. The budget is deep in the red, and getting it back into the black cannot be accomplished without major actions. Although the heart of the problem is the lack of political will to make responsible policy choices, the broken process contributes significantly to the nation?s dangerous fiscal situation.No Plan Can Work When the Process is Broken
Today, budgets are created annually, without any kind of fiscal target guiding the process. There is no single identifiable ?budget,? and the President and congressional committees operate on separate tracks with no shared objective: the President makes a proposal; and the House and Senate Budget Committees may, or may not, develop their own budget resolutions, which, however, lack the force of law. Increasingly, there is no comprehensive action on a budget at all: rather, the government operates on a series of short-term appropriations or continuing resolutions, followed by huge omnibus spending bills, with occasional piecemeal enactment of changes in other spending or tax laws. In practice, the bulk of the government?s spending and revenue occurs on autopilot, without annual review or
any constraint on growth.
The current budget framework is too short-sighted and tends to focus primarily on the upcoming year. The result is that lawmakers routinely continue programs that could not withstand rigorous evaluation of their costs and benefits. The short-term appeal of the government?s spending more than the people are willing to pay has contributed to deficit spending?even during periods of economic growth, when surpluses should be the norm. Erosion of the commitment to balanced budgets has produced an environment in which it has become acceptable to borrow in order to spend more. While borrowing is not always bad?it can be useful in a recession?sustained periods of borrowing damage the economy and eventually lower the nation?s living standards.
Current unsustainable policies result in large part from a process that does not require policymakers to lay out a fiscal plan with feasible limits or to consider the long-term implications of their decisions.
Can anyone from either party dispute the notion the budget process is broken? I think not.
The question then is what to do about it. Unfortunately, the Pew Commission ignores the fact that the lobbyists write our legislation (GE's corporate tax rate is proof enough). However, the report does have some ideas with potential to rectify some of the flawed process.
Establish Strong and Comprehensive Enforcement Procedures
From page 19 of the report ....
Past automatic triggers have failed in part because so many programs were exempt from the trigger and it was so easy to bypass the restrictions. The Commission recommends that its proposed triggers apply to the broadest base possible, including all discretionary and mandatory programs and all taxes. For revenues, the Commission proposes a broad-based surtax; for spending, all programs?both mandatory and discretionary?would have across the board reductions. The debt trigger would be 50 percent tax increases and 50 percent spending cuts, with credit given for policies enacted that year on either side of the budget. A broad base would be more effective in keeping the plan on track because it would raise the political consequences for policymakers of failing to meet targets. It would thereby create incentives for Congress and the President to craft their own fiscal policies, rather than relying on formulaic reductions to meet the debt targets.History of Budget Trigger Failures
Ignoring details regarding proposed cuts, a target of $4 trillion in cuts spread out over 10 years is simply not deep enough. It would not balance the budget soon, if indeed ever. That chart of interest on the national debt shows exactly why.
Box 6 on page 20 gives "A History of Budget Triggers in the US". Unfortunately, the success rate has been horrendous for various reasons.
Would another set of more comprehensive triggers be any better? The answer is perhaps. The reason is there are distasteful provisions that affect both parties as well as provisions both parties would like.
Republicans would be in favor of forced spending cuts, Democrats in favor of forced tax hikes. Both sides just may take that into consideration before passing more pork barrel legislation.
Color me skeptical, but another go at triggers probably cannot hurt. Regardless, triggers or not, something has to give because the US is on a path to fiscal ruin.
For additional discussion, please see Deficit Reduction: Are Higher Taxes and Reduced Military Spending Coming? Can the "Gang of Six" Accomplish Anything?
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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