Chaos Theory says that the order one perceives is not the true order. Originally developed to attack forecast models for the weather, and later extended to the economy, chaos theory would apply nicely to the federal budget, where nothing ever turns out as advertised. Take the Clinton Administration’s constant boasting that next year’s budget deficit (FY 1995) will fall to $170 billion as a result of the budget cuts and tax increases in last year’s “deal of the century.” In fact, the only real budget cuts came in defense, where spending as a share of GDP will soon drop to 3.5 per cent, its lowest level in over forty years, a fact duly noted by North Korea’s Kim Il Sung and other rogues around the world.
Meanwhile, domestic spending, which has increased 9 per cent annually over the past five years, is projected to rise by another 6 per cent per year, or twice the projected inflation rate, over the next five years. Hardly budget-cutting. What is more, the Clintonites have come up with massive new entitlement proposals for health care and welfare reform. These measures may be defeated this year, to be revisited by a more conservative Congress in 1995. But should they pass in this session, universally mandated health care and unlimited training and government jobs for welfare recipients would soon raise entitlement spending to double-digit growth rates. So much for future restraint.
As matters now stand, means-tested entitlements (e.g., Medicaid, food stamps, supplemental security income, AFDC, veterans’ pensions, student loans) are expected to grow at a 9 per cent annual rate, or three times predicted inflation, over the next five years. Non-means-tested entitlements (mostly Social Security and Medicare, but also unemployment compensation, farm price supports, and others) are projected to rise 6 per cent per year. So, if all this spending is rising, why does Washington keep telling us about huge reductions in the deficit, not only from last year’s deal, but also from George Bush’s Presidency-ending deal in 1990? The answer is chaos theory: What is supposed to be is not.
There’s even more of this on the revenue side. Remember the tax hike of 1990, when Bush moved his lips? It was supposed to raise $158 billion over five years. The latest estimates from the Congressional Budget Office (CBO) show a $486-billion shortfall from the initial baseline projection. Just a slight miss, really. So why should anyone believe that last year’s tax hike will produce the projected $241-billion rise in revenues?
Indeed, revenue is already slipping. Congress expected income-tax receipts to grow by 7.2 per cent as a result of its ‘tax-the-rich” hike in the top individual-income-tax rate from 31 per cent to 40 per cent. For the first seven months (October through April) of FY 1994, these receipts have grown by only 6.2 per cent.
If this trend continues, Uncle Sam will come up $5 billion short by the end of the fiscal year. If individual income-tax receipts fall 1 percentage point below projections for five years, then the government will cumulatively fall $90 billion short, just in this one area. No one listened last year to Harvard economist Martin Feldstein and others who argued that higher tax rates on upper-income earners would lead to greater tax avoidance and reduced workforce participation, especially by spouses and other part-time earners. But that is exactly what seems to be happening.
One additional deception, back in the spending area. In 1990, much noise was made over the so-called tight-as-a-drum caps on discretionary (read: non-entitlement) spending. But the drum’s canvas cover has badly sagged. The level of defense spending has declined by $24 billion since 1990. However, these savings” were simply re-channeled into domestic discretionary spending; they were not used to reduce the deficit. During the past six years “government investment” (in transportation, community development, education, training, employment, and the environment) increased by $45 billion, or roughly 8 per cent a year.
More recently, Congress and the White House have colluded to break the spending caps by using emergencies such as hurricanes, floods, and earthquakes to lard supplemental appropriations bills with sizable pork. Of the $11 billion expended for the L.A. earthquake, for example, $3.2 billion was clearly non-emergency funding. In fact, domestic emergency” authorizations in recent years have totaled nearly $40 billion, completely busting the spending caps.
Looking at this Alice-in-Wonderland fiscal fairy tale, where tax hikes do not generate higher revenues, and spending cuts turn into increases, one might reasonably ask: How is it that the deficit has still come down below $200 billion? There are two answers. First, the gradual recovery of the nation’s banking system has lowered government outlays for deposit insurance by $74 billion in the past two years, as the Resolution Trust Corporation (RTC) is now collecting money from the sale of assets, rather than spending money to purchase them. But this has nothing to do with ongoing program spending.
Second, Congress and the Administration continue to count Social Security and other retirement trust-fund surpluses – averaging roughly $135 billion a year over the next five years – as part of the overall deficit total, despite a truth-in-budgeting bill a few years ago that explicitly put such surpluses off-budget.
To identify the actual on-budget or cash deficit, the budget totals must be adjusted first to exclude the one-time S&L bail-out transactions and then to exclude the raid on retirement trust funds improperly used to finance ongoing programs. When this is done, a truer picture appears: $267 billion in 1994, $250 billion in 1995. Now, these are numbers we never hear from President Clinton, or OMB Director Panetta, or anyone else in official Washington; they consistently use figures of under $200 billion. Even more staggering, after two budget “deals of the century,” if we exclude the civilian and military retirement trust-fund surpluses, then the estimated deficit rises to $331 billion for 1994, hovers around $300 billion in 1995, and moves up to $353 billion by 1999. $353 billion? Hardly worth the two largest tax increases in peacetime history, which have produced the weakest recovery in forty years.
With this in mind, it is no wonder that younger congressmen in both parties are pressing for tough budget reforms to enforce rules strictly, do more to control spending, and obviate the need for additional tax increases. GOP budget expert John Kasich (R., Ohio) believes that the budget arteries are still severed and will again start gushing new blood” unless his proposal is passed in this session.
Known as the Common Cents Budget Reform Act of 1994, and cosponsored by Charles Stenholm (D., Tex.) and Tim Penny (D., Minn.), this bill’s principal contribution would be to put an end to the “current services baseline,” whereby each new budget is based not on the actual level of last year’s budget spending, but instead on that spending adjusted upward by forecasts of future inflation, population growth, and various fudge factors. Not only does baseline budgeting ensure constant overspending, it permits congressmen to he to their constituents about budget cuts.
Imagine a family that initially decides to buy a $30,000 car, then opts instead for one that costs $20,000. The family is still out 20 large ones. In Congress, however, that would be scored as a $10,000 budget cut”! In practice, if a program like welfare is projected to rise by 10 per cent, and instead increases by 9 per cent, congressmen go home and tell their constituents they have “painfully cut” welfare. Kasich-Penny-Stenholm would put a stop to this, by requiring the White House and Congress to compare new budgets to the amount actually spent in the prior year, without any automatic increases.
Another bill, proposed by Representative Chris Cox (R., Calif.) and cosponsored in the Senate by Trent Lott (R., Miss.), Richard Shelby (D., Ala.), Bob Dole (R., Kan.), and Phil Gramm (R., Tex.), would require a two-thirds super-majority for any waivers related to budget rule-making. This would apply to spending increases above the level set in the joint budget resolution, including entitlements (other than Social Security) and all supplemental appropriations, including emergency spending measures.