The Murray-Ryan Budget Agreement: An Acceptably Flawed Deal

Sorry for the delay in posts – busy couple of weeks.  So let’s look at what’s happened as of late:

Besides the ongoing ObamaCare fiasco, the latest political buzz is all about the recent budget deal for FY 2014  and FY 2015 produced by Representative Paul Ryan (R-WI) and Senator Patty Murray (D-WA).  The deal has promptly lead to loud opposition from conservative organizations and members of Congress, as it partially reverses the sequester by restoring approximately $63 billion in discretionary spending for FY 2014 and 2015 (even while calling for these spending increases to be offset by $85 billion in cuts over the next decade).  Marco Rubio (R – FL) says the budget “…fails to tackle our long-term fiscal challenges”, and many others are stating that it reverses “progress” made under the sequester.  Here are my thoughts:

  1. Tinkering with discretionary spending has almost no effect on our long-term fiscal challenges. We’ve all heard about how the entitlement programs (Medicare, Medicaid, Social Security, etc.) will bankrupt the country in the long-run as the baby boomers retire and (partially as a result) health care costs continue their upward march.  Indeed, this is true: as the Heritage Foundation has noted, mandatory spending is estimated to grow by about 79% over the next decade alone.  I find it puzzling, then, that almost all budget battles center around discretionary spending (domestic programs, like education & transportation, and security, like national defense).  Total discretionary spending is currently capped at around $967 billion/year, which is less than 1/3 of total spending of about $3.45 trillion.  This budget deal resets those levels to just over $1 trillion/year.  To put this in context, this amount is still 8% lower than FY 2010 discretionary authority, and discretionary spending is still projected to reach record lows as a % of GDP in the coming decade (even if the Murray-Ryan deal is implemented).  Meanwhile, mandatory spending is set to reach record highs as a percent of GDP.  The point?  While I’m all for budgetary efficiency, adjusting annual discretionary spending by less than $100 billion a year (and at levels well below previous records) as the budget deal does will neither exacerbate or alleviate our long-run fiscal problems.  Although important, it is truly not the fiscal elephant in the room.
  2. An imperfect budget deal with slightly higher spending is much better than a thriftier budget acquired via the threat of debt default and other forms of brinkmanship.  Since 2011, it has become a habit of Congress (especially the House of Representatives) to use America’s debt-ceiling and the threat of governmental shutdown as leverage for spending cuts.   Those leading the brinkmanship crusades (especially Tea Party Republicans) rationalize their behavior with the (not necessarily untrue) claim high deficits and debt cause significant business uncertainty, which they cite as the #1 inhibitor of economic growth.  Being the self-proclaimed defenders of business, they thus have repeatedly used the threat of debt default and government shutdowns to lock in spending cuts.  Ironically, however, these methods of governing have instead significantly increased policy uncertainty. In fact, fiscal policy uncertainty (including increased debt yields due to the repeated threat of default) is estimated by the Peter G. Peterson Institute to have reduced economic growth by approximately 12% since 2009.  As a result, it is quite possible that much of the deficit reduction acquired through actions that have increased policy uncertainty have actually been slightly or wholly cancelled out by the resultant slower economic growth (which would produce lower than expected revenues and higher than expected expenditures). As such, the Murray-Ryan budget deal, which lays out a tentative 2-year budget plan and would temporarily end budgetary impasses is a much better alternative for both the economy and deficit reduction.
  3. Quality is just as (if not more) important than quantity.   We constantly hear tons of different budget numbers being thrown around in debate ($967 billion in discretionary spending, $17 trillion debt, etc.) While these number are important, perhaps even more important is asking whether what is being funded is a) a legitimate government function b) gives us a positive rate of return c) is being funded at adequate levels for optimal performance.  In fact, before even beginning a discussion on FY 2014’s appropriations, Americans need to have a serious discussion about what they expect government to do, with the numbers to follow that conversation.  For example, America’s defense budget has absorbed big funding cuts over the past few year, with more pain to come.  However, what we expect the military to do (patrol the seas, r&d, stabilize other nations, etc.) has not been altered as significantly.  Such scenarios are becoming more common across the budget – busy programs with declining resources.  This then begs the question as to whether it is better to have a few well-funded, well functioning programs that we actually value or many under-funded, poorly functioning programs that are not valued.  Personally, I’d rather have the former scenario.

More to follow in the morning…

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