Eating Peas

Fellow Ordinaries Elias Isquith and Mike Dwyer have fired the opening shots in our discussion about the latest budget proposal from that fiscal firebrand from Janesville, Paul Ryan, and Tod Kelly (who has just been knocking them out of the park on these pages recently) has given a much-needed reminder to everyone that minding our manners is helpful and parroting memes and calling each other names isn’t.

It’s easy to understand how tempers can flare over issues like the budget, so I thought I might take it upon myself to point out some things that might be helpful.

1. Our President acts like he is really our Prime Minister. This President’s style, even with his centerpiece campaign issue of health care reform, has been to describe a big idea and let Congress craft out the nuts and bolts — or not. The way he addresses at least domestic policy has always been, and is likely to continue to be, largely deferential to Congress. That is to be expected, given his background before taking his seat in the Oval Office. But his vision of his role as President is that of a Legislator-in-Chief. And equally distressing from a leadership perspective, in terms of the budget, little effort has been made by the White House to articulating a vision of what the government’s budget should be now that we are past the era of viable stimulus packages. Thus, Prime Minister Obama is a re-actor, not an initiator, of budget policy. This is a problem because…

2. Congress is institutionally incapable of addressing our government’s money problems. It’s as simple as this: Ways and Means is one committee, Budget is another. How the government generates its revenue — taxes — is handled by one group of specialists in Congress. What the government does with that money is handled bya  different group of specialists. They can talk to each other, sure, and they often do. But because the intelligence, willpower, creativity, and political power is divided between people who focus on different things. Ask someone on the Ways and Means committee how the budget should be brought in balance, and chances are good that Democrats and Republicans alike will say that spending cuts must make up the bulk of that effort; ask someone on Budget and the answer will be that taxes and revenues must be addressed in a serious way, even by Republicans. That includes Paul Ryan. But even though we’re supposedly out of the era of stimulus spending, we’re still more than fifteen trillion dollars in debt and that number is increasing by more than a trillion dollars a year. That is alarming, if nothing else, and I think that it’s a problem. And we only have two tools to solve it with because…

3. We aren’t going to inflate our way out of the problem. Historically, the traditional way governments have navigated through prolonged unsustainable periods of deficit spending has been to make the deficits sustainable through inflation. If tomorrow’s dollars are worth substantially less than today’s dollars, then paying yesterday’s debts with tomorrow’s dollars makes a lot of sense — it’s literally free money if the inflation and interest rates are balanced correctly. But we’ve delegated monetary policy to the Federal Reserve, and the Fed is backed into a corner. Interest rates cannot go any lower than zero, and both the internal and external pressures on the Fed’s board are strongly anti-inflationary. Now, inflation is greater than zero — 12.6% over the past ten years. But the public as a whole will not tolerate a high level of inflation and there is no real political appetite for it anywhere, including amongst the twelve unelected people who could actually do something about it. Given that, we have to cut spending or increases taxes. Now as for that first option that’s eliciting all the howls, which in turn are eliciting all the jeers…

4. It sucks to cut spending, and spending cuts will have to come from somewhere. The primary objection to the Ryan budget is a familiar one: it cuts too much social welfare, deblitatingly so. Maybe that’s true. By my estimation, social welfare programs and the bureaucracies that support them constitute 62% of the Federal Budget.* We cannot make meaningful cuts if 62% of the budget is untouchable. Defense constitutes close to 19% more and yes, that too should be on the chopping block. I happen to think that if we stop exporting liberty to Afghanistan on flying death robots and bring the bulk of our troops home, nothing material will change in Afghanistan that actually affects the United States, and substantial savings will be realized, and fewer of our soldiers will die when ancient holy books get looked at cross-eyed. But that’s just me. Anyway, interest on the debt is about 4% of the budget and that is literally the only part that cannot be cut even if there is sufficient political will to do so. If you’re going to cut spending, then there must be no sacred cows. Now, that doesn’t mean we can ignore taxes, but…

5. It sucks to raise taxes, and the government has to generate money from somewhere. Just under half of all Federal revenues come from individual income taxes. The upper brackets already pay a tremendous percentage of that. Maybe they can pay more, maybe not. Corporate income taxes are about one-tenth of all Federal receipts. Social Security withholding is about a third of the total. Pretty much the rest comes from what some call “ad valorem” taxes, consisting almost exclusively of excise taxes on petroleum and natural gas, and pay-at-the-pump taxes on gasoline and similar refined petroleum products. And those are the only significant sources of Federal revenue. Customs duties aren’t a big part of that picture; this isn’t 1812. Whatever isn’t earned from one of those three sources is brought in by the sale of debt instruments like bonds and T- bills. That’s where the money comes from, so those are about the only places anyone can look to beef up revenue. And this limited universe of options to tackle such a massive and sensitive problem is compounded by the fundamental fact of life that…

6. Differing visions of the good are compatible with one another in a democracy, but we shouldn’t forget that are, in fact, different. My co-blogger Will had a great insight the other day, which in my opinion didn’t get the number of comments that it deserved. In a nutshell, Will pointed out that it turns out, it’s really true that people have different ideas about what a good society is, and while genuinely differ from one another in good faith, they do in fact genuinely differ from one another. That’s what a free society is about, it’s what a democratic framework of government is about, and working through those differing visions of the good is what public policy and even political debate is supposed to do. Do you realize what this means? If it’s true that someone else has a different vision of the good than me, then listening becomes as important as advocacy. Sadly, there isn’t a lot of listening going on with respect to this subject.

Bearing all that in mind, I make two propositions concerning this most recent Paul Ryan budget proposal which I submit for your consideration.

First, Paul Ryan just might be attempting to do something good here. Maybe you don’t think it’s good. But you should assume that he does right out of the starting gate. You should not assume that he is trying to protect his fat-cat donors and big corporations at the expense of the poor and the middle class because he is a Republican. Collectively, the Republicans are making a genuine bid for blue-collar, working-class votes. They aren’t just the party of the rich; and Democrats have plenty of corporate money and lists of fat-cat donors themselves.

The vision of the good that Ryan is, or at least appears to be, pursuing is a vision of a balanced budget and a government that engages in sustainable but reduced levels of activity. This may not be your vision of a good society or the government’s appropriate role in it. Elias pointed out in his article that a strong social welfare program may well increase social mobility. I kind of doubt that I agree with that in practice, at least as a broad rule. But the point is, a government that deliberately keeps its hands off of certain kinds of economic activities, and that doesn’t spend more than it takes in, is a defensible and viable vision of a good society.

To determine whether you think the Ryan budget is a good one or not, you must first articulate, if only to yourself, what you think a good budget would be. And don’t short-sightedly and immediately react to Ryan by saying, “Well, a good budget certainly doesn’t cut my favorite and indispensible program!” Because maybe it does. Elias reacts strongly to cuts in the Federal Department of Education, predicated in part on the idea that education is an investment in the future; without a well-educated society and workforce, we will be less economically viable as a nation in the future. This is true, but I have to wonder — for every dollar spent on educating, say, a fifth-grader, where does that money come from? I’ll bet that the number of Federal pennies in that dollar is in the single digits, and the rest comes from state and local taxes already, and pretty much always has.

I happen to think that, in broad strokes, the vision of a government that spends only what it takes in is a good one. Some others moderately disagree with me and think that at least a certain level of deficit spending is sustainable and even desirable. Still others — and specimens of this sort can be found in both parties — strongly disagree with me and think that deficits and the debt doesn’t matter at all, and we should spend what we need to in order to realize other priorities, borrow what we need to in order to cover it, and that with sufficient long-term economic growth and appropriate levels of inflation and interest, tomorrow can solve all of today’s fiscal problems. I don’t see that as a bad-faith vision of the good, but it is one with which I sharply disagree. This disposes me to want to say that a guy like Ryan is, at least in broad strokes, looking down the correct path. But I also know I need to do business with people from the other camps — and if that sounds a little Broderesque, I can live with that.

What I can’t live with is the approach to the subject that Congress, as an institution, seems to take. Collectively, Congress and the President all seem to think that the strategy of kicking the can down the road for the government to solve in ten or twenty years is the right solution. That’s a fine political solution. But at some point, you have to stop kicking the can down the road and pick it up and do something with it. Put it in a trash can or a recycle bin or make something out of it or just leave it be.

So: do you think a balanced budget is a priority at all? If so, how high a priority is it — meaning, if you want a balanced budged, what would you be willing to deficit-spend in order to accomplish? Or, you can decide that you think we can live with running our existing deficit indefinitely. Articulate the answer to this question before you evaluate Ryan’s proposal as good, bad, or indifferent.

My second proposition is that given a political landscape in which the President seems content to dispose of what Congress proposes, and in which Congress is divided into split partisan control of its houses and institutionally divided within those houses to prevent anyone from realizing a vision of realizing a coherent fiscal strategy, you’ve got Ryan working without any effective coordination with the people who are in charge of raising taxes. He knows that he’s going to have to negotiate with the Senate, and then negotiate with the White House. That’s how the process works, and what Ryan is doing is called, in my line of work, “an opening offer.”

Opening offers are important for two reasons: first, they define your objectives; second, they set one of the outer limits for the arena of negotiation. For that reason, opening offers typically constitute more than you’re hoping for even if you win it all; no one expects an opening offer to be accepted, and everyone expects that the opening offer will be so ambitious as to elicit a gasp from the offeror’s negotiating partners. The gasp is as much for show and posture as it is a genuine expression of outrage. Once the gasping is done, a counter-offer is made, equally ambitious for the other side, and now that the parameters are set, the real work can begin.

That’s what’s going on here — Ryan is making an opening offer in pursuit of a balanced budget. I cannot fault him for that.

If the government is going to move closer to a balanced budget, which is the vision of the good that Ryan is pursuing, then that means in this landscape it’s inevitably going to be a question of what blend of spending cuts and tax hikes we endure. How much do we cut, and from where; how much do we raise taxes, and on whom?

My political comment is — if we assume that inflation will remain at its current level, and we further assume that we are going to move towards bringing the budget back into balance, then every dollar that we don’t cut from our spending today is $1.25 that we will have to cut in 2022; every dollar that we don’t raise in taxes today is $1.25 that we will have to raise in 2022. Spending cuts and the tax hikes now are going to hurt. But they aren’t going to hurt any less in the future, and indeed will probably hurt more then.

So. Are we going to eat our peas, or not?

* Health and Human Services; Housing and Urban Development; Medicaid and related programs passed through to states; Medicare; Social Security; Unemployment and related mandatory welfare spending; Veteran’s Affairs; and a few others. See this pie chart for an overall look at FY 2010 spending.