A Disconnected Budget Debate

A Disconnected Budget Debate

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Capital Exchange is a new blog featuring debate among some of Washington’s smartest budget and policy experts. –Eric Pianin, Washington Editor and Moderator

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The president has submitted his 2011 budget and is establishing a fiscal responsibility and reform commission.  Congress has returned from a short break, ready to begin in earnest the debate on next year's budget.  At this early stage, the key issues are already clear.  Unfortunately, it's also already clear that the debate over how to deal with them will likely have only a tenuous connection to reality.

Undoubtedly, the budget debate will be dominated by two huge issues — an economic recovery and decline in unemployment that is slower than the public would like, and deficits that are higher than the public and fiscal experts think are appropriate.  Such consensus on the problems to address ordinarily might suggest that lawmakers will likely take meaningful action to address them.  But the debate on these issues so far seems disconnected from the realities about what it will take to address these problems.

Regarding the economy, there is an overwhelming consensus among economists that last year's American Recovery and Reinvestment Act (ARRA) has significantly boosted economic growth and reduced unemployment compared to what would have happened without it. Even with the benefits of that legislation, unemployment will likely remain near 10 percent throughout this year.  Lawmakers, quite reasonably, want to enact legislation to produce more jobs and lower the unemployment rate more quickly.

 The most sensible and efficient way to create more jobs is to do more of what has proven effective — to extend ARRA provisions that are expiring (such as extended unemployment benefits and the increase in the federal matching rate for Medicaid) and provide another dose of fiscal relief for states struggling to balance their budgets.  But the jobs debate is instead almost entirely devoted to relatively small new tax proposals, which hold much less promise for substantially increasing the number of jobs than extending and expanding the ARRA provisions.  Some additional measures could prove useful, but if they are enacted in place of doing more of what would truly be effective, it would represent a triumph of appearance over substance.

Regarding deficits, large numbers of lawmakers are expressing serious concerns about the size of federal deficits both now and in the future.  Unfortunately, some seem to think the deficits projected for this and the next few years are the problem.  In reality, the current deficits represent only a small fraction of the real, long-term fiscal problem the nation faces – and trying to reduce deficits before the economic recovery is fully underway will likely cause more harm than good.  Policymakers should focus instead be on steps that will begin the process of substantially reducing deficits projected under current policies for the latter half of this decade and succeeding decades.

Furthermore, the debate on individual tax and spending issues belies the seemingly widespread concern about the size of deficits.  Virtually every serious budget analyst who has studied the long-term problem has concluded that the single-most important thing that must be done to reduce future deficits is to slow the rate of growth of spending on health care.  But this has not prevented numerous lawmakers from opposing health reform legislation — or elements of the legislation — because it would slow the growth of benefits provided to some individuals.  Similarly, although deficits are projected to grow at unsustainable rates because the revenues to be collected under current policies are insufficient, the tax debate is dominated by calls to make the estate tax even more generous in the future than it was in 2009, to prevent the scheduled expiration of the Bush tax cuts even for the very highest-income Americans, and to oppose the president's proposals to close a wide array of tax loopholes and special interest provisions.

If the nation is to make progress in promoting job growth and addressing our long-term budget problem, the debate must focus more on what really needs to be done to achieve those goals and less on promoting legislation that gives the appearance of progress and opposing proposals that are politically difficult but would actually help bring deficits under control.

James R. Horney is Director of Federal Policy at the Center on Budget and Policy Priorities.