What can be done to address our growing deficits?
The history of budget deficits. Evaluate the reforms discussed and pick 3 that you believe would be most effective at influencing budget reforms and reducing deficits.
from defiCit to surplus to defiCit, 1991–2012 The Omnibus Budget Reconciliation Act of 1990, while it did not promise a balanced bud- get, was projected to put the budget on a path to that budgetary promised land. But while a CBO analysis done immediately after the passage of OBRA 1990 projected a deficit of only $29 billion by fiscal year 1995, an analysis done only 13 months later projected a deficit in excess of $200 billion by mid-decade.45 This deterioration resulted from the effects of economic recession, not because of any policy actions. It meant, among other things, that the deficit was a salient issue in the 1992 presidential campaign, which saw the election of Bill Clinton. The same election also featured the strong showing of third-party candidate Ross Perot, who was able to garner enough votes that Clinton was elected with only 43% of the popular vote. Because many of Perot’s supporters had been advocates of greater deficit reduction, both political parties needed to appeal to these voters by embracing deficit reduction as a policy goal.46 Coming into office in January 1993, President Clinton attempted to follow through on his campaign promise to bring the budget deficit under control. In fact, the Clinton administration embraced deficit reduction as a top priority only after it failed to gain congressional approval of a proposed stimulus package to bolster a weak economy. Critics, who claimed the package was unnecessary because the economy was already on the rebound and because the government could not afford more spending at a time when the deficit was high, were successful in defeating the proposal in the Sen- ate. The administration then turned its attention to a comprehensive deficit reduction proposal.47 the 1993 Budget agreement The Omnibus Budget Reconciliation Act of 1993, adopted in August 1993, was approved by the narrowest of margins: 218 to 216 in the House and 51 to 50 in the Senate (Vice Presi- dent Gore cast the tie-breaking vote).48 The measure was passed without any Republican votes (neither on the reconciliation bill nor on the budget resolution that preceded it) and with considerable pressure applied by Republican members to have their Democratic colleagues join them in the opposition. The Clinton administration knew that the vote would be close, so the White House lobbied members with great intensity. As a result, all members had ample opportunity to be involved in the process of adopting the budget, unlike in earlier situations, such as in 1990, when the rank and file complained that the leadership had made all of the decisions. The 1993 law included four types of actions: 1. Tax increases, particularly increases in individual income taxes for the wealthiest Americans, gasoline taxes, and corporate taxes; 2. Spending cuts, notably cuts in Medicare, Medicaid, and defense, but in other programs as well; 3. Spending increases, such as for empowerment zones, which are designated urban and rural areas that are provided with increased services to attract business; and 4. Tax expenditures, such as tax credits for lower-income workers and tax incentives for businesses operating in empowerment zones. Overall, the law was expected to shrink, but in no way eliminate, the deficit. The spend- ing caps and the PAYGO process from the Budget Enforcement Act were revised and extended through fiscal 1998.49 Annual deficits under the law were expected to approach $200 billion. Because nearly $500 billion in deficits was to be eliminated over five years, the debt was expected to increase by “only” $1.1 trillion over that same period. The total deficit reductions were expected to be equal to or somewhat less than the reductions that resulted from the Budget Enforcement Act of 1990. If the administration wanted to tackle the budget deficit in earnest, then another round of spending cuts and tax increases would be necessary. Furthermore, the budget would need to be revisited if the president and Congress could reach agreement on a plan for revising health care and its financing, a high priority of the first Clinton administration and one that failed to win congressional approval. The November 1994 elections set up a situation ripe for intense executive–legislative con- flict that would benefit few, harm many, and add to the skepticism of the citizenry about the worthiness of government and its political leaders. The elections produced victories for the Republicans, giving them the control of both the Senate, which had been under Republican control for six years during the Reagan administration, and the House of Rep- resentatives, which had not been under Republican rule for 40 years. The House’s new Speaker, Newt Gingrich (R-GA), had championed a Contract with America in the elections. Gingrich, along with a sizable group of newly elected Republican members, felt deeply com- mitted to legislating the various components of the contract.50 Their extensive package of proposals included a balanced budget amendment to the Constitution, the line-item veto, and the requirement of a three-fifths majority vote to raise taxes. The new House majority was also committed (at least on paper) to shrinking the size of domestic government. The new Republican Congress and the Democratic president found themselves on an unavoidable collision track. The Republicans managed to produce a reconciliation bill in spring 1995 that included substantial reductions in many federal programs, including a $270 billion reduction over seven years (from the baseline) for Medicare spending.51 This proposal was projected to result in a balanced budget by fiscal year 2002. When Congress sent this bill to President Clinton, however, he vetoed it as “extreme.” Congress responded by holding appropriation bills hostage until or unless Clinton capitulated on reconciliation. In particular, Congress insisted that the president come up with his own balanced budget plan using the more conservative budget estimates of the Congressional Budget Office, rather than the more optimistic Office of Management and Budget projections. When the president refused to agree to the congressional assumptions or timetable, the resulting “train wreck” led to portions of the government being forced to shut down for two extended periods (November 14 to 19, 1995; and December 16, 1995, to January 8, 1996).52 People were inconvenienced in innumerable respects, such as not being able to visit the Grand Canyon and not being able to obtain a passport for overseas travel. While the government continued to distribute Social Security payments, processing was halted on new applications for benefits. Businesses in Washington, DC, that relied on patronage from business travelers and tourists, were hurt financially as people stayed away from the city. Eventually, the congressional Republicans capitulated. There was no reconciliation bill and a compromise was reached on discretionary spending that did not cut appropriations by as much as was desired by the Republicans. All participants were eager to have the battles resolved, if for only a short period, to avoid having this situation continue into the 1996 presi- dential election. As it was, Republicans probably were blamed by the electorate for the shut- downs and overall chaos, partially explaining their losses in the House of Representatives, albeit not enough to lose control, and the win by President Clinton in his bid for reelection.53 the 1997 Balanced Budget act January 1997 ushered in the 105th Congress, with a new collective mindset, and was the beginning of President Clinton’s second and final term in office. The congressional eadership realized that a balanced budget could not be achieved without Clinton’s sup- port, as it would be virtually impossible to gain enough votes to override any presidential veto. A balanced budget would inevitably involve budget cuts, which are always unpopular with anyone affected by them. As a consequence, Republicans were eager for a bipartisan budget agreement as a means for spreading the blame for cuts in programs. President Clinton, who had earlier championed the idea of a balanced budget, may well have seen 1997 as an opportunity to achieve this goal and consequently to enhance his record of achievement. Working behind the scenes was a group of largely conservative Democrats in the House, who billed themselves as the “Blue Dogs,” eager to find some middle-road compromise that would avoid elimination of programs as a budget reduction effort and yet bring spending under control to balance the budget.54 In May 1997, President Clinton and the Republican leadership in Congress agreed on the outline for a package of decisions that was supposed to balance the budget by 2002.55 The agreement was followed by passage of two key laws—the Balanced Budget Act and the Taxpayer Relief Act—both of which were signed by President Clinton at a special cere- mony on August 5, 1997. The Balanced Budget Act was an immense piece of legislation covering such topics as food stamps, housing, communications, welfare, education, civil service retirement, and much, much more. The Taxpayer Relief Act provided tax benefits for college education, capital gains tax cuts, family tax credits for children, and other relief measures.56 Cuts in domestic programs were included, and Medicare expenditures were shaved back. Although spending for Medicaid, which serves the needy, was reduced, the cuts were not as severe as some had advocated. The Balanced Budget Act made permanent the requirement that budget resolutions cover a five-year period. Discretionary spending limits, to be enforced through sequestra- tion, were extended through fiscal year 2002, as were PAYGO requirements. the arrival—and disappearance—of surpluses The sustained growth of the economy that continued into the late 1990s accelerated the timetable for the achievement of surpluses. Fueled in large part by increases in federal revenues (which grew by an average of 8.4% per year between fiscal years 1995 and 2000 with no changes in rates), the budget surplus arrived a full four years earlier than had been projected. The federal government ran a unified budget surplus of $69 billion in fiscal year 1998. The surplus, which was the first since fiscal year 1969, grew to $129 billion in 1999 and to $236 billion in 2000.57 Attention then turned from the question of “How do we get rid of the deficit?” to “What do we do with the surplus?” The debt held by the public at the end of fiscal year 2001, which was the last year of the budget surplus, was $3.3 trillion, or $450 billion less than it had been in fiscal year 1997, when there was a budget deficit.58 George W. Bush assumed the presidency in January 2001. Within a month after he had taken office, CBO projected cumulative surpluses of $5.6 trillion between fiscal years 2002 and 2011; perhaps not entirely coincidentally, OMB followed suit only one month later.59 Three competing uses of the surplus were debated in the spring of 2001. One group wanted to use the surplus to pay down the debt as quickly as possible. A second group advocated spending the surplus on key domestic programs, including (in particular) a prescription drug benefit for Medicare. A third group advocated a tax cut. Many supported a combina- tion of these three approaches. Ultimately, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 produced a tax cut estimated to amount to $1.3 trillion over 10 years. The tax cut alterna- tive was given substantial legs by Federal Reserve Board Chairman Alan Greenspan, who reversed his earlier opposition to tax cuts in light of the large projected surpluses.61 For the personal income tax, the bill created a new 10% tax bracket, redefined the 15% bracket, and effected a gradual reduction in other marginal rates. By the time the cut was fully phased in, the rates for the other brackets were 25%, 28%, 33%, and 35%. In addition, the act phased in a number of other changes, such as repealing the current restrictions on itemized deductions and personal exemptions, doubling the child tax credit (to $1,000) over a 10-year period, and phasing out the estate tax over a 10-year period.62 The estimate of $1.3 trillion tax cut understates its magnitude, since various provisions were “turned off” in later years so as not to exceed the allowable cost of the tax cut under reconciliation. (Under the “Byrd Rule,” reconciliation provisions cannot increase the defi- cit in any year beyond those covered by reconciliation.) In 2010, Congress and the presi- dent agreed to extend the Bush tax cuts for two years, through fiscal year 2012. From that point forward, CBO estimated that if some future Congress and future president do not allow these provisions to expire (which seems likely), this action would add another $932 billion to deficits through 2016, and more than $2.9 trillion to deficits through 2021.63 The tax cut is one of several factors that contributed to a substantially deteriorating budget outlook for the federal government during the first decade of the 21st century.64 Revenues and spending were affected by the continuing weakness of the economy in 2001. Furthermore, the terrorist attacks of September 11, 2001, occasioned a response that will have continuing budgetary ramifications. This response included not only the remediation of the immediate effects of the attacks, but also a domestic and international response. On the domestic front, Congress and the president created the Department of Homeland Security (DHS), which combined a great many agencies that had been in separate depart- ments under a single agency. In addition, costly wars in Afghanistan and Iraq were justified on the basis of a continued war on terrorism. In 2011, CBO estimated that these mili- tary actions had cost almost $1.3 trillion between fiscal years 2001 and 2011.65 Finally, an extremely severe hurricane season in 2005 resulted in horrific death and destruction in the Gulf Coast area, occasioning an unprecedented federal disaster relief effort. The recession that began in 2007 had a substantial effect on the deficit outlook. This recession, as noted earlier, was the most severe experienced by the country since the Great Depression 80 years earlier. The lowered economic output reduced tax revenues, especially for the individual and corporate income taxes. In fact, both revenue sources declined in nominal terms from fiscal year 2007 to 2008, and again from 2008 to 2009. The individual tax continued its decline between fiscal year 2009 to 2010.66 On the spending side, a com- bination of increases in spending for automatic stabilizers—such as unemployment com- pensation, Medicaid, and food assistance under the Supplemental Nutrition Assistance Program (SNAP—formerly food stamps)—increased budget deficits. In addition, however, Congress and the president took a series of legislative actions to combat the recession, with the stated goal of warding off another depression (see discussion in the chapter on govern- ment and the economy). These included: • Spending for the Troubled Asset Relief Program (TARP), which attempted to respond to the precarious financial conditions of many large financial institutions whose greed had led them to make ill-advised investments in costly subprime mortgages. This program was later expanded to include the provision of assistance to distressed auto- mobile manufacturers General Motors and Chrysler. While $700 billion was approved under this program, less than two-thirds of this amount was ever used. Furthermore, in the case of financial institutions, the federal government purchased stock in these banks that could later be sold. Then, when the government ultimately divested itself of these assets, this often resulted in a profit to the government. When all these factors are considered, CBO by 2011 estimated that the TARP, far from costing $700 billion, in fact cost about $20 billion. This cost included losses of $14 billion associated with the automobile bailout and another $14 billion of funds provided to the American Insurance Group (AIG). These costs were offset by profits from the sale of stock of other firms.67 • The American Recovery and Reinvestment Act (ARRA), which attempted to provide short-term stimulus through a combination of revenue reductions and spending increases. On the spending side, the focus was on infrastructure projects that could be started in short order, and aid to state and local governments designed to lessen the need for these governments to lay off teachers and other personnel.68 • The bailout by the federal government of the mortgage giants Fannie Mae and Fred- die Mac, which was actually much more costly than the TARP. These firms, which guaranteed a large number of subprime mortgages and compounded that exposure by making risky investments of their own, had argued for many years that they were not creating an implicit financial risk for the taxpayer, while all the time reaping the benefit that came from Wall Street believing that they would be bailed out should they ever fail. If there ever was any question which of these two positions was cor- rect, it was answered in September 2009 when the government was forced to take over Fannie and Freddie. As of March 2011, CBO estimated the cost of this takeover at $130 billion, although it is possible that this figure could decline if the GSEs pay more to the Treasury than they receive in payments in the future, which is a plausible scenario.69 • Extension of the Bush tax cuts of 2001 and 2003, most of which were scheduled to expire, for two years beginning in 2010. This measure was taken partially out of fear that raising taxes (which would have been the result of allowing them to expire) would choke off the economic recovery. This extension punted down the road (past the 2012 presidential election) the ultimate decision of what to do about these tax cuts beyond fiscal year 2013. table 10–3 shows the trend in deficits and surpluses for the federal government from fiscal year 1985 through fiscal year 2011. The table clearly demonstrates the rise in the defi- cit, the four years of budget surplus from 1998 through 2001, and the return of the deficit after 2002. Table 10–3 Federal Deficits and Surpluses, Fiscal Year 1985 Through Fiscal Year 2011 ($ billions) Fiscal Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Surplus or Deficit −212.3 −221.2 −149.7 −155.2 −152.6 −221.0 −269.2 −290.3 −255.1 −203.2 −164.0 −107.4 −21.9 69.3 125.6 236.2 128.2 −157.8 −377.6 −412.7 −318.3 −248.2 −160.7 −458.6 −1,412.7 −1,293.5 −1,295.6 Source: Congressional Budget Office (2012). The budget and economic outlook: fiscal years 2013–2021 (p. 1
By January 2012, the Congressional Budget Office had released a revision of its budget outlook that underscored just how much the fiscal situation had deteriorated since January 2001. In this forecast, CBO estimated that the federal budget would experience cumulative deficits, in the amount of $3.1 trillion for the period of fiscal years 2013 to 2022. Under this projection, the debt held by the public as a percentage of GDP would actually drop from 75% in 2013 to 62% by 2022.70 This forecast was quite likely optimistic, since CBO’s budget projections must assume “current law,” and current law does not include some likely changes in policy, such as extending the tax cuts, that would make the deficit outlook worse. In fact, CBO projected that, including extending the tax cuts and other likely policy changes, the debt held by the public would approach 100% of GDP by 2022.71 What to do about this? To say that the president and Congress have had difficulty devising solutions to the deficit problem seems the height of understatement. After the Bush administration punted the problem down the road for much of the first decade of the twenty-first century, the Obama administration appointed a deficit commission in 2010, headed by former Senator Alan Simpson (R-WY) and former Clinton chief of staff Erskine Bowles. They recommended a sweeping set of spending reductions and tax increases late in 2010, which were subsequently ignored by the president when his budget was put together.72 Many other private groups have also looked at this problem, and there is a remarkable degree of consensus around imperatives to reduce the debt to a more man- ageable level, such as 60% of GDP.73 In the spring and summer of 2011, an opportunity seemed to present itself when the federal government was poised to hit its debt ceiling once again. Although many people argued that the debt ceiling is an archaic requirement (since the vote comes long after the policies that necessitate the debt have been approved), many new members of Congress refused to vote to raise the debt limit unless that vote was accompanied by other actions to reduce the national debt. Because House Republicans, in particular, were opposed to any revenue increases, the practical implication of this was to pressure Congress to enact spending reductions in order to avoid an unthinkable and economically costly fiscal insol- vency. Such an insolvency would have forced the government to begin choosing, as early as early August 2011, which bills to pay and which bills to leave unpaid. Finally, on August 3, 2011, an agreement was reached with passage of the Budget Control Act of 2011. The Bud- get Control Act created new discretionary spending caps, covering fiscal years 2013 to 2021. In addition, it required each house to vote on an amendment to the Constitution requiring an annually balanced federal budget. Finally, it created a new committee, the Joint Select Committee on Deficit Reduction. The Joint Select Committee (or “supercommittee,” as it came to be called) was a committee of 12 members (six from each house, and six from each party) tasked to identify an additional $1.5 trillion in deficit savings by November 23, 2011. The supercommittee’s recommendations were to be voted on, without amendment, by the rest of Congress. Absent an agreement on at least $1.2 trillion in savings, in January 2013 a sequestration process would kick in covering a period through fiscal year 2012, that would take 50% of budget reductions from the defense budget and 50% from domestic programs (although some programs, such as Social Security, were either exempt from sequestration or the level of sequestration was limited).74 Days before the deadline arrived, the supercom- mittee announced that it had failed to reach agreement. The short-term problems pale in comparison to the long-term fiscal imbalance faced by the country. The growth in entitlement spending, fueled by demographic and cost changes, threatens to overwhelm the federal budget over the next 75 years. Because of demographics and increased costs, the major entitlement programs—Social Security, Medicare, and Medicaid—have highly uncertain fiscal futures. Since Social Security and Medicare represent transfers between current workers (who pay the payroll taxes) and current retirees (who receive the benefits financed by those taxes), the impending retirement of the baby boomers will have a substantial effect on the finances of these programs. At the same time, individuals are living longer, thus receiving benefits from these programs for a longer period of time. More importantly, Medicare and Medicaid are affected by the same cost growth as the rest of the health care system. The cost of the government’s health care programs is expected to decrease slightly as a result of the Patient Protection and Affordable Care Act signed into law by President Obama in 2010, but it will come nowhere near solving the long-term fiscal problem. All told, CBO’s long-term model suggests that, under plausible scenarios that would extend cur- rent law and assume other changes that seem likely to occur, spending would rise to 25% of GDP by 2035 (the historical 40-year average is 21%), revenues would remain at roughly their historical average of 18%, and debt held by the public would rise to 187% of GDP by that same year.75 proposed reforms and their prospeCts Congress, the president, and the nation face a complex set of interwoven problems. Tre- mendous uncertainty remains concerning budget priorities and the proper role of govern- ment, and this controversy will play out as the government comes to grips with the federal debt, as it inevitably must do. The current budget process seems dysfunctional, with the most basic tasks, like the adoption of a budget resolution or appropriation bills, proving elusive in a number of recent years. Given this, it is reasonable to ask what changes might be made to the budget process, and even whether the whole idea of establishing a congres- sional budget process was doomed from the start.76 The movement of the budget from deficit to surplus and back to deficit again has policy makers struggling to establish the correct goals for the budget. In addition, the nation faces what is perhaps a fundamental and expensive shift in priorities to con- front threats to security both at home and abroad. In the short run, the wars in Iraq and Afghanistan seem to have given the Defense Department a blank check. How- ever, a perennial question is: How much defense is enough? Defense policy must be rethought given the absence of the threat of nuclear attack by Russia, the potential threat of terrorism, and the instability in particular regions of the world, especially the Middle East. Unless there are conflicts that are similar in scope that replace those in Iraq and Afghanistan, there is the probability that the defense budget may be able to be downsized substantially in the coming years. At the same time, the budget faces a lurking fiscal time bomb, associated with the government’s entitlement programs.77 Can Congress better organize itself to deal effectively with this daunting set of prob- lems?78 If Congress’s primary role is to set policy and provide leadership in furthering the nation’s interests, then do means exist for improving the processes of that august body to help it meet its responsibilities? Since the budget process is at the very center of policy making, it attracts much attention from reformers and raises fundamental questions. For example, how should power be distributed between the leadership and the individual members? Placing power in the hands of those in leadership positions can help facilitate decision making, but at the same time can subjugate the voices of individual members who have been chosen by their voters to represent them.79 This is certainly an issue that has been illustrated starkly by the creation of the supercommit- tee—12 members of Congress who had the power to set the budget agenda for every- one else. How should responsibilities be distributed between new members and those with seniority? How should power be shared by the two chambers of Congress? To what extent should or must Congress delegate powers, such as the power to sequester funds, to the president and to others in the executive branch of government? These questions of process cut to the core of any congressional member’s future. For example, getting appointed to the “right” committee—any committee in a position to address the needs of one’s home district—is considered critical, and any plan to reorganize the committee structure is necessarily regarded as threatening. One view is that Congress will never be able to deal with fundamental problems as long as campaign funds must be obtained largely through contributions from constituent organizations. Those organiza- tions are likely to donate substantial funds only on the condition that members provide pork barrel spending and other immediate benefits. Budget process reform proposals are hardy perennials in Congress. Many members, convinced that the current process is fundamentally broken, propose changes in budget procedures or institutions as solutions to fiscal problems. There are many more of these proposals than can be catalogued on these pages, but among the most common are reforms that would give the president a line-item veto, would amend the Constitution to require a balanced budget, would reorganize Congress as it deals with the budget, and would convert Congress to a biennial budget process. the line-item veto Most governors (43 out of 50) have line-item veto power, allowing them to reduce or elimi- nate line items in appropriation bills. The president of the United States has historically lacked such power. The power could be provided in a statute or, as many would advocate, in an amendment to the Constitution. Thomas Jefferson may have been the first president to refuse to spend money appropriated by Congress, and Ulysses S. Grant was apparently the first president to ask for the item-veto power. He called for the line-item veto in his fifth State of the Union address in 1873.80 Pros and Cons of the Line-Item Veto One of the main justifications cited for the line-item veto is that the president needs the authority to reduce or eliminate funding of pork barrel projects that have little merit other than pleasing specific constituent groups of individual members of Congress. However, what constitutes excesses in spending is necessarily a function of one’s values and priori- ties, and the executive branch is not immune from advocating spending for programs and projects of questionable utility. One aspect that is clearly not a purpose of the line-item veto is to reduce the budget deficit. The spending cuts that might be made by a president would be unlikely to have any appreciable effect on total spending.81 Critics of the line-item veto contend that it gives the president an unwarranted increase in power, allowing for presidential policy preferences to supplant congressional prefer- ences. If a president needed to muster senatorial votes for an initiative, he could privately threaten to item-veto favored projects of individual senators. When the White House was controlled by one political party and Congress by the other, White House priorities might prevail. One can speculate that if Presidents Reagan and George H. W. Bush had been able to wield item-veto power, then several agencies and programs would have been elimi- nated, such as the Economic Development Administration, the Appalachian Regional Commission, and urban mass-transportation formula grants. Procedures, as initially established by the Congressional Budget and Impoundment Con- trol Act of 1974, provide that the president submits packages of proposed rescissions in appropriations enacted by Congress. Congress has 45 days in which it is in session to approve each package or approve its own set of cuts. Before adopting an appropriation bill, Congress is made aware of what items are likely to be cut by the president. Presidential priorities are reported to Congress through budget submissions and statements of adminis- tration policy, which indicate White House opposition to provisions in draft appropriation bills. Similarly, congressional intentions are also provided to the administration, through the OMB, during the budget markup process, and the White House has an opportunity to comment and give feedback to the subcommittees marking up the bill. After appropria- tions, when the president does propose rescissions, a consistent pattern has been that Con- gress makes greater cuts than recommended by the president, albeit using a different set of priorities to determine which items will be cut.82 Enhanced Rescission and the Line Item Veto Act After decades of debate, the Republican-controlled Congress enacted the Line Item Veto Act (LIVA) of 1996, which was part of the Contract with America. The act took effect in January 1997, giving President Clinton a tool to use against Congress dur- ing the 1997 legislative session. A general consensus exists that “true” item-veto power could be provided to the president only through a constitutional amendment and, therefore, the 1996 law is best viewed as enhanced rescission power. The 1996 law explicitly recognized that many “earmarks” (another name for pork barrel items) are listed not in the legislation itself (an appropriation bill or a tax bill, for example) but in committee reports accompanying those bills. Significantly, then, the LIVA gave the president power to cancel three types of provisions: (1) new items of discretionary spending (found either in appropriation bills or in committee reports accompanying these bills); (2) new entitlements or increased entitlements; and (3) tax provisions that would benefit 100 or fewer individuals or corporations. The president was required to veto an entire item and not just reduce an amount, and he could not veto existing entitlement programs and other forms of mandatory spending. The law had a sunset provision, withdrawing this power from the president on January 1, 2005.83 In an effort to circumvent the Supreme Court’s ban on legislative vetoes (see the discus- sion of the Chadha decision in the previous chapter on budget approval), the 1996 measure provided a convoluted form of veto. The president was to submit a set of proposed budget cuts. Congress then had 30 calendar days, during a time when it was in session, to consider passing a disapproval bill. If Congress did not act, the proposed vetoes would take effect. The disapproval bill would be on an expedited schedule but would go through the stan- dard procedure of passage in both houses and, most likely, a conference committee proce- dure for working out the differences between the houses. The president could then either sign or veto the disapproval bill. A veto of the disapproval bill would mean he was standing behind his original set of decisions to cut items in the budget. Congress could override the president’s veto only by a two-thirds vote. The line-item veto was first used by President Clinton to cut three items from the Bal- anced Budget Act of 1997 and the Taxpayer Relief Act of 1997, just five days after sign- ing these laws. The vetoes covered (1) tax shelters for financial service companies, (2) a Medicaid provision that specifically would benefit New York State and New York City, and (3) a tax benefit that would go to a small number of agribusinesses, including large corpo- rations that in his view did not need such a tax advantage. Clinton noted that many items were protected from his veto on the grounds that the White House had an obligation to act in good faith in retaining items that had been explicitly approved as part of the bargaining process with the Republican-controlled Congress.84 He agreed with suggestions from the press that the vetoed items were relatively minor but noted that he expected more signifi- cant vetoes to arise when appropriation bills began to reach his desk for approval. President Clinton also used the line-item veto power in the appropriation process. By far the most aggressive use of this power was on the military construction appropriation bill, where he cancelled 38 projects totaling $287 million. Congress used the procedures contained in the act to pass a disapproval bill, which was ultimately vetoed by President Clinton. His veto was overridden by Congress, thereby restoring funding for these projects. Clinton was much more restrained in his use of the veto on other appropriation bills, can- celing only $190 million in total budget authority from those other 12 bills.85 The Line Item Veto Act included a section for judicial review, allowing for members of Congress and others to file suit in the U.S. District Court for the District of Columbia, with its decision being appealable directly to the Supreme Court. Well before President Clin- ton had an opportunity to use this new set of powers, the law was challenged in court by Senator Robert C. Byrd (D-WV), who had been the law’s most outspoken critic, calling it “a malformed monstrosity.”86 The district court agreed with Byrd that the law had unconsti- tutionally delegated congressional powers to the president. That decision was appealed to the Supreme Court, which ruled on a procedural rather than substantive basis. In Raines v. Byrd (1997), the Court decided that Byrd and others lacked standing, a condition in which the party bringing suit must show that an injury has occurred or is about to occur.87 The Court found that an injury had not occurred, as the president had not yet exercised the new power granted to him. Standing was said to be especially important in cases involving conflict between two branches of the government, in this case, between Congress and the president. Ultimately, the constitutionality of the Line Item Veto Act was challenged on its merits by individuals with standing who had suffered injury as a result of its application. In late 1997, two suits were brought: one by the City of New York and the other by the Snake River (Idaho) Potato Growers over Clinton’s cancellation of items in the Balanced Budget Act and the Taxpayer Relief Act, respectively. The law was found unconstitutional in U.S. Dis- trict Court, and in 1998, the Supreme Court, in a 6 to 3 decision, sided with the District Court in the case of Clinton v. City of New York.88 The Court ruled that the act ran afoul of the Presentment Clause of the Constitution because it permitted the president to unilater- ally unmake law that had been made by both houses of Congress in concert with the presi- dent. The majority argued that providing the president with the kind of power envisioned in the act would require an amendment to the Constitution. Thus, the Line Item Veto Act was relegated to a one-year experiment—a blip on the federal budgeting radar screen.89 Subsequently, Presidents Bush and Obama each proposed a reduced form of line-item veto authority through what is referred to as “expedited rescission.” Under this proposal, a president would be guaranteed a vote on rescission proposals that he proposed, and indi- vidual items would be subjected to an “up-or-down” vote on the Senate or House floor. The presumption is that these items would be subject to greater scrutiny, making it harder for the more egregious pork barrel projects to survive.90 The House of Representatives passed a version of President Bush’s proposal in June 2006.91 In the 111th Congress, the expedited rescission approach was probably best exemplified by S. 102, sponsored by Senators Carper and McCain. No expedited rescission proposal has come to a vote in either house during the 111th Congress. Thus, as of 2012, the president still lacked any form of line-item veto authority other than the narrow authority to propose rescissions granted by the 1974 law. proposed Balanced Budget requirement A persistent proposal has been for the federal government to adopt a balanced budget requirement.92 Proponents typically refer to the successful use of this requirement at the state level—all states except Vermont currently require some form of balanced budget.93 Note that balanced budget requirements in most states do not preclude borrowing for capi- tal investments, and few state budgets are annually balanced when both current and capital expenditures are taken into account. Many states also have limitations on revenue raising and spending, stemming from the Proposition 13 movement of the 1970s. A major concern regarding implementation of a balanced budget requirement at the federal level is that the measure might impose unwarranted restrictions in times of eco- nomic hardship or national security emergencies.94 Some form of override mechanism must be included for situations when the federal government needs to spend more to counteract economic recessions and to wage war. For the override to occur, both houses might be required to have votes of 60%, two-thirds, or a majority of all members (rather than a majority of those voting). Having some set of enforcement mechanisms is regarded as essential for successful imple- mentation, although such mechanisms do not exist at the state level, where the balanced budget process is regarded as generally successful. The states, however, have an externally imposed imperative for bringing revenues and expenditures into structural balance: Failing to do so would have an adverse effect on their bond ratings and borrowing costs. Skeptics of congressional abilities to reach agreement on a balanced budget fear that Congress would resort to “smoke and mirror” techniques that merely give the illusion of a balanced budget. Such devices might include overestimating revenues to be collected and moving some expenditures off-budget so that they would be excluded from official total spending. These are, of course, precisely the kinds of tricks that resulted under Gramm-Rudman-Hollings, the federal government’s prior failed experiment with fixed deficit targets. Attempting to prohibit such practices by outlawing them in the constitu- tional amendment would be cumbersome, and creative minds might always be able to find loopholes in the amendment’s language. In addition, detailed provisions in the amend- ment could create an inflexibility that later might prove detrimental to the nation’s best interests. Critics of the balanced budget amendment contend that it would unduly enhance the powers of the president. A typical requirement of balanced budget proposals is that the president would have to submit a balanced budget, thereby setting the agenda from which Congress might have little latitude to veer. One line of reasoning states that for the pro- posal to be effective, a line-item veto for the president would be essential. Another criticism is that an annually balanced budget is not an appropriate goal for federal fiscal policy. The federal government has routinely, and appropriately, engaged in deficit spending during times of recession or when it needed to deal with other emergencies.95 Furthermore, to the extent that the balanced budget amendment is sought as a means to avoid deficit spend- ing, it seems useful to point out that it is not self-enforcing. The spending cuts and tax increases, and enforcement mechanisms, would still need to be enacted. It is these actions, not the Constitution, that are central to getting control of the nation’s debt.96 Once the budget moved from deficit to surplus in 1998, the interest in a balanced bud- get amendment waned. But with the reemergence of budget deficits and the potential search for a new consensus for an overall goal of fiscal policy, members of Congress have begun to propose such an amendment again. As noted above, the Republican majority in the House of Representatives expressed interest in a balanced budget amendment dur- ing the 2011 budget debates. Some more conservative House members, particularly those identified with the Tea Party movement, backed a version of the balanced budget amend- ment that not only would require an annually balanced budget, but also would include a spending limitation (such as 18% of GDP) and a supermajority requirement to raise taxes. Ultimately, the House voted on a more traditional form of the balanced budget amend- ment in November 2011; it fell 23 votes short of the two-thirds necessary for passage, thus killing the amendment for the time being. proposed Congressional reorganization A perennial topic of discussion in Congress is how it could better organize itself to fulfill its responsibilities, especially its budget responsibilities. Important changes did occur as a result of passage of the Legislative Reorganization Acts of 1946 and 1970 as well as other reorganizations that affected either the House or the Senate.97 Committees One typical proposal is to reduce the number of congressional committees and subcommit- tees. These various bodies create problems in coordination, because their domains often overlap and subject areas are needlessly segmented among committees and subcommittees. Power becomes diffuse, and setting overall policy is complicated by the split jurisdictions. The greater the number of committees, the greater the number of committee assignments members have, meaning that they can easily be scheduled to attend two or more commit- tee meetings at the same time. This problem is even more acute in the Senate, where 100 members must handle the same work that is done by the 435 members in the House. The large number of committees and subcommittees poses problems for the executive branch as well as for Congress. Agency administrators complain that valuable time is wasted in having to prepare for and testify before these panels. The defense area is particularly subject to comprehensive congressional involvement, with Defense Department officials having to testify before dozens of committees and subcommittees. The size of committee membership is a related concern. Memberships are often large because members want to be placed on committees of relevance to their home districts and states. However, the larger the committee size, the greater the number of committees on which members serve and the greater the number of meetings they are unable to attend. The result is a proxy system in which another member, often the chair, casts votes for absent members on the committee. Although considerable agreement may exist that Congress needs to reduce the number of committees and subcommittees, the task is difficult. Chairing one of these committees provides power, prestige, and perquisites, so any chairperson or other senior member on the committee is likely to defend continuance of the committee and repel efforts to dimin- ish the committee’s powers.98 Members in both houses have historically sought seats on committees dealing with the various aspects of the budget as a means of gaining power over congressional actions. One controversial suggestion has been that the budget process could be streamlined by eliminating the two Appropriations Committees and assigning their duties to the commit- tees that handle authorizations. Rather than appropriation bills emanating from one com- mittee, they would arise from the standing substantive committees in each chamber. Critics of this proposal contend that such a reform would worsen the budget situation, because the Appropriations Committees are far more likely to restrict government spending than the substantive committees, which are often seen as having been captured by the executive branch agencies that they oversee. Furthermore, the Appropriations Committees currently wield great power, and they vigorously oppose any efforts to reduce that power. They would not be abolished without a fight. Other committee-related proposals involve reconfiguring the House and Senate Bud- get Committees (possibly even merging them into a joint committee) or making them into leadership committees by including chairs and other ranking members on the budget committees. The assumption behind this proposal is that including the leadership would provide greater incentives for the budget resolution to be enacted, and for other commit- tees to make a more good-faith effort to comply with its strictures.99 Some still argue that these committees should be eliminated on the grounds that they have merely added to the complexity of congressional budgeting, and have recently failed to accomplish their major objective in any event.100 Biennial Budgeting One frequently mentioned proposal is to change over to a biennial budget.101 Since Con- gress has such difficulty acting on a budget, why not simplify the problem by requiring action only every other year? The idea of moving the federal government from an annual to a biennial process is not a new one. Representative Leon Panetta (D-CA) introduced the first bill proposing such a change in 1977, and the proposal has been more or less an annual entry in the budget reform sweepstakes since then. Most biennial budgeting proposals would have the president submit the budget biennially and would also feature biennial budget resolutions and appropriations. Perhaps the high-water mark for biennial budgeting came in 1993, when both the Joint Committee on the Organization of Congress and Vice President Gore’s National Perfor- mance Review recommended that the federal government adopt a biennial timetable for the process. Most recently, biennial budgeting was the key proposed reform that the Sen- ate Budget Committee recommended to the Joint Select Committee on Deficit Reduction, after holding hearings in the fall of 2011.102 When the supercommittee died, so did this proposal. Despite this long history of support, in fact, no bill to create a biennial process has ever passed either the House or the Senate. Proponents of biennial budgeting argue that the current annual process features repeti- tive votes on many fiscal issues that eat up valuable committee and floor time. For example, there may be three votes on the budget for defense: one associated with the budget reso- lution, one associated with the annual defense authorization bill, and one on the annual defense appropriation bill. Second, in a related issue, supporters note that time spent on budgeting cannot be spent on other activities, particularly detailed oversight of federal pro- grams. In particular, these advocates of a biennial process indicate that the need for Con- gress to review agency performance under the Government Performance and Results Act necessitates spending more time on such detailed oversight. Third, supporters point to the dismal record of Congress and the president in enacting annual appropriation bills prior to the start of each fiscal year. Finally, executive branch officials decry the time-consuming nature of the annual process from their perspective. The sequence of developing an agency budget request, having that budget undergo review by the Office of Management and Bud- get and the president, and justifying the budget to Congress is continuous in an annual process.103 There are also numerous arguments offered by skeptics of biennial budgeting. First, the federal government has a rather checkered history of budget forecasting. Producing a bud- get every two years would increase the probability that budgets would be based on erroneous information. A two-year budget resolution adopted in April, for example, would be adopted a full 30 months before the end of the second fiscal year of the biennium. The agencies would have begun developing their budgets for that fiscal year at least 10 months prior to the passage of the budget resolution, or more than three years from the end of the second fiscal year of the biennium. Second, opponents argue that the benefits of biennial budget- ing (decreased time on budgeting, more time for oversight) are overstated. The biennial process may degenerate into an annual process, given the uncertainties associated with bud- geting for an almost $4 trillion enterprise (Congress already engages in an annual process of adopting supplemental appropriations) and the likelihood that Appropriations Committee members will want to act on the budget every year. Third, an increase in oversight under biennial budgeting would occur only if the current lack of oversight results from a lack of time. Opponents argue that even if members of Congress had more time to do oversight, they would not be likely to do more of it simply because they do not have any incentives to do so. Understanding more about how federal programs work in great detail is not politically sexy, nor does it offer any specific benefits in terms of helping members get reelected.104 other proposed revisions in the Budget process While the previously mentioned changes have been the most frequently debated, they are by no means the only reform proposals put forth. One set of reforms proposes to include more performance information in the budget process. Another reform hopes to bring more accrual accounting concepts to the federal government. At least four other reforms are also worthy of discussion—automatic continuing resolutions, making the budget reso- lution into a joint resolution, capital budgeting, and sunset provisions for federal programs. Automatic Continuing Resolutions Under this proposed reform, the institution of automatic continuing resolutions for appro- priations would become another possible strategy. If Congress failed to pass an appropri- ation bill, the agencies affected would operate with a continuing appropriation without Congress having to act. Since congressional failure to act on the budget in a timely fash- ion has become the norm, the obvious advantage of an automatic continuing resolution is that it would eliminate the crisis handling of appropriation bills. The disadvantage of the proposal is that incentives for Congress to adopt regular appropriation bills would be reduced.105 Joint Budget Resolutions A more far-reaching proposal would eliminate the concurrent nature of budget resolu- tions, which do not require presidential signature, and substitute a joint resolution or law to be signed by the president.106 In effect, budget summitry would be employed at the outset of the budget process. The hope is that the president and key congressional lead- ers would develop an annual budget resolution that all would support, thereby helping to ensure more timely action as the details of the budget are worked out at a later time. Budget summits bind all participants so that a president who endorsed a summit agreement could not later renege when Congress passed appropriation bills in conformance with the agree- ment. The downside of a joint budget resolution is that conflict would be “front loaded.” Obtaining the agreement of both houses without having the president involved has often proved difficult. Allowing the president to have a veto over the budget resolution might be the practical equivalent of ensuring that no budget resolution will occur in many years.107 Capital Budgeting Adoption of a capital budgeting system is yet another possibility. It is advocated as a way of helping to put the deficit into perspective, because it would show that much of federal spending is of an investment nature and not simply annual consumption. However, the fed- eral budget has very little investment in it, if one excludes major defense systems and inter- governmental transfers to state and local governments for infrastructure (see the chapter on capital assets and capital budgeting for a discussion of the pros and cons of capital bud- geting). Capital budgeting presumably would encourage better planning of expenditures. On the negative side, capital budgets could be used to downplay the true magnitude of fed- eral budget deficits and total debt. More and more of the budget could be “capitalized” as
Robert D. Lee Jr., Ronald W. Johnson, Philip G. Joyce. (2013). Public Budgeting Systems, 9th Edition
