Dangerous Budget Thinking

Can budgeting be “rational?”  Certainly participants accuse each other of irrational views, such as about tax increases.  And decades of budget reforms have sought to make the process better fit economists’ views of a rational process.  Yet much of the common discussion of budgeting serves to make it less rational, not more so.  The most dangerous ideas involve the idea that there is a proper “size of government,” and the idea that all we need to do is make “tough choices.”

This post will explain why “size of government” is an irrational standard; the next will explain why a preference for “tough choices” is at best misleading; and a final post will draw conclusions about current deficit-control efforts.

What would rational budgeting be?  An ideal process would create a package of government spending and taxing that had the best possible effect on social welfare.  People will disagree greatly about what that would be, so all we can reasonably ask is that a process allow for careful weighing of cost and benefits in a way that represents interests fairly.

If that is what we want, however, the common view that reform should focus in some way on the “size of government” makes little sense.  This view is held most explicitly by conservatives who will argue, for example, that the federal government should be no larger than 18 percent of the economy .  So, for example, if national security required a large increase in spending, by this view either the nation should not be defended or, more likely, other activities that used to be considered useful (e.g., feeding the poor or helping to educate children) somehow are no longer a reasonable value.  The logical question would be why an attack on our nation somehow makes education less important.  There is no logical answer.

Any view that spending should be some standard share of the economy ignores both the benefits and costs of the particular package of government activities.  Such a view can be “rational” if one adopts an ideology that assumes away the specifics.  Michael Tanner, for example, writes that taxes are “evil” .  The George W. Bush administration, in its National Homeland Security Strategy, declared that extra expenses of the “War on Terror” should not be paid for by raising revenues, because taxes always hurt the economy, so paying for protecting ourselves would just increase the damage done by terrorism. (I’m not kidding: see page 65 of http://www.dhs.gov/xlibrary/assets/nat_strat_hls.pdf ).  A less extreme view might posit that in some cases government programs help maintain the society that has an economy, so perhaps such sweeping economic models are not appropriate.  But such a view requires distinguishing among programs, which is precisely what a view that emphasizes “size of government” will not do.

The very routines of budgeting, however, can begin from unexamined assumptions about totals.  This is hard to avoid in practice, but needs to be noticed, not ignored.  Consider the common claim that the budget is heading for massive deficits because of increased costs for health care and Social Security.  In fact, projections show rising deficits due to increased costs for health care and Social Security without increased revenue to pay for them.  If current policy included dedicated revenues to match any spending increase, there would be no budgetary “entitlement crisis” – even though “entitlements” would be projected to grow just as much.

Does that mean that spending growth for Social Security and health programs should not be a concern?  No: it means the right question is whether having Social Security and a growing federal role in health care increase social welfare in a way that is worth paying for with taxes.  My point is that this is not a question that anyone should imagine can be answered by saying spending, or taxes,  “should not grow above a certain share of the economy.”  The right question is what amount of pensions or health care on the government budget is the best policy.

Budget controllers always care more about totals than about details.  This enables sloppy analysis of the sort that says, in essence, “oh my god, entitlements are growing, they’re going to kill us, it’s so irresponsible, those terrible greedy geezers are destroying the economy” – which is not just the position of conservative bloggers on this site but, apparently, of the co-chairmen of President Obama’s deficit reduction commission and the most prominent promoters of the idea of an “entitlement crisis,” such as Peter G. Peterson.

Careful budget analysis might consider the following possibility: Perhaps a healthy economy and decent country require that citizens have some guarantee of a decent retirement.  Any system of retirement funding will involve a mix of government guarantees, financed by taxes, and private assets, financed by voluntary contributions.  Recent experience reminds us that private assets involve major risks so do not guarantee a minimum income.  There’s a huge literature on how Social Security accompanies that goal, and little reason to believe it is especially generous. (Readers might consult the nasi.org website for a wide range of material). 

So the right question is: what are the costs and benefits of serving this social (and individual!) purpose through government, rather than through the market or families or charity?  If Social Security is a good value, then the size of government should grow to pay for it; the “crisis” isn’t about “entitlements” but about revenue.  But baselines that simply look at changes from current revenues and spending make it seem as if the problem is the future “size of government,” rather than its financing.

The case for increasing government spending on health care depends, as does the case for pensions, on what you believe about how the programs work.  But again, the right question is what are the costs and benefits of serving this social and individual purpose through government, rather than the alternatives.  Increasing the “size of government” by increasing budgeted spending on health care could even leave more funds for private spending on everything other than health care.  If my position is true, wouldn’t it make more sense for everyone (other than the health care industry), as a matter of costs and benefits, to have “bigger government?”

My point is not that the answer is obvious.  The point is that debate is dominated by the wrong question.  Conservative advocates such as Brian Riedl and Mike Tanner will claim to agree with me, of course, that the right issue is whether programs are worth the money.  Yet they are happy to promote and exploit the view that, in addition, there is something inherently wrong about “taxes” per se or about spending exceeding some arbitrary share of the economy.  This view is promoted by forces far more powerful than the right wing for which they work. 

Budget totals have little meaning unless we understand the specific effects of both spending programs and revenue policies.  Unfortunately, many editorial boards, economists, politicians and investment bankers can promote a budgetary panic without recognizing the importance of budget details for reasons that go far beyond ideological beliefs about the size of government or taxes, or even the routines of budget analysis.  At a very basic level, budget debate really is irrational.  I’ll explain why in the next two posts.

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Joseph White is Director of the Center for Policy Studies at Case Western Reserve University.