Sunday, February 11, 2018

What's the Deal?

David Super

     With the media awash in stories claiming that this week’s budget deal is a dramatic turning point in fiscal policy, setting out what it does and does not do seems worthwhile. 

     From a fiscal point of view, the Democrats achieved a surprisingly large increase in non-defense discretionary spending, albeit starting from a very negative base.  For the current fiscal year and the one that starts this coming fall, the agreement would erase one of the two major rounds of reductions in defense and non-defense spending that Republicans extracted in the Budget Control Act of 2011.  The full implications will not be clear until Congress passes final spending legislation next month.

     A bit of background is necessary here.  Republicans forced President Obama and congressional Democrats to agree to the Budget Control Act as the price of their agreeing to raise the debt limit.  It dramatically lowered the annual ceilings on defense and non-defense discretionary appropriations for the next ten years.  It also established a bipartisan commission to find means of achieving further deficit reduction.  The Act provided that if the commission failed to agree on a plan for further deficit reduction, or if Congress failed to enact a commission recommendation, further deep across-the-board cuts would occur automatically.  This second round of reductions to the discretionary spending caps, known as sequestration, was to cut defense and non-defense spending to a roughly equal degree. 

     President Obama’s staff argued that the threat of defense spending being sequestered would force Republicans to agree to a balanced plan of tax increases and entitlement cuts to achieve the additional savings required to prevent sequestration.  In practice, Republicans held firm to their “no new taxes” mantra, and the commission deadlocked.  When sequestration took effect, considerable chaos ensued, including huge lines at airports for security screenings. 

     Instead of prompting Congress to revoke sequestration, as some had hoped, these problems only caused Congress to shift money around to avoid the highest-profile problems.  The result has been chronic underfunding of numerous governmental functions.  Administrators cut corners and took risky chances to function with inadequate funding; when the inevitable failures caught the public’s attention, they typically were attributed to incompetence or stupidity rather than chronic underfunding.  This enabled a new round of attacks on the Obama Administration in particular and government in general.  For example, with chronic underfunding having thinned the ranks of officials performing environmental assessments, Republicans and industry have complained (with little empirical support) that these reviews are holding up important projects and must be curtailed.  The real scandal of the attack in Benghazi was that protection for diplomats in war-torn areas had been cut back so severely that Ambassador Stevens could only do his job by gambling with his life. 

     The Budget Control Act’s defense cuts have been moderated consistently with “emergency” appropriations outside the caps for “Overseas Combat Operations (OCO)”.  In practice, the Pentagon has stretched the definition of what is needed to support our wars in Afghanistan and Iraq to supplement its basic operating budget.  Democrats have tried, with far less success, to achieve similar ends with proposals for “emergency” funding outside of the caps for various domestic crises. 

     The spending caps resulting from the Budget Control Act made annual appropriations bills all but impossible to enact.  The caps necessitated such low funding for domestic programs that Democrats did not want to be associated with these bills, and Republicans were uncomfortable taking sole blame for these unpopular cuts.  The House Republican Freedom Caucus and similar factions also refused to support appropriations bills, demanding ever-deeper cuts. 

     As a result, Congress has enacted a series of bipartisan agreements raising the discretionary spending caps for one or two years with the cost offset through cuts to entitlement programs and extensions of the Budget Control Act beyond its originally scheduled expiration.  This past week’s Bipartisan Budget Act of 2018 (Public Law No. 115-123) is the latest of these temporary cap-raising bills. 

     The Bipartisan Budget Act raises the caps on discretionary spending more during its two-year life than prior cap-raising agreements have.  The levels it sets for the caps fully eliminate the effects of the Budget Control Act’s sequestration cuts but not the Budget Control Act’s initial cuts to discretionary appropriations caps.  As a result, non-defense discretionary spending in the two years covered by this agreement will be 5.3% below 2010 levels adjusted for inflation and 11.0% below 2010 levels adjusted for inflation and population growth.  Previous cap-raising bills did significantly less. 

     Republicans demanded that the defense caps rise more than the non-defense caps; that did not happen to any great degree, although the OCO escape valve has made the defense caps much less onerous even before the legislation.  Republicans also demanded that the domestic spending increases, but not the defense ones, be offset with cuts to entitlement programs.  The final legislation includes a package of offsets that Republicans can claim pay for some of the non-defense spending and that Democrats can claim pay for part of both the defense and the non-defense increases.  Some of the offsets are real, some are less so, but none of them appear to be deeply destructive. 

     Left unanswered by this legislation is just how the additional spending will be allocated.  In the past, after raising the discretionary spending caps with the help of Democratic votes, Republican appropriators have shut Democrats out of the process of distributing these funds, allocating relatively little to Democrats high-priority programs, leading some to question whether the deals were worth it.  Having been burned in this manner before, Democrats surely obtained side deals about how the restored funding will be spent, but we will not see evidence of them until an omnibus appropriations act for the rest of the current fiscal year moves through Congress next month. 

     The Bipartisan Budget Act contains significant emergency funding for disaster-stricken areas, including Puerto Rico and the U.S. Virgin Islands.  This includes additional money to supplement the grossly inadequate Medicaid block grants for the island territories.  (This experience should provide a powerful warning of the dangers of proposals to block-grant other important programs nationwide.)  The Act also includes a relatively small amount of supplemental appropriations to respond to various problems, real and political, and renews funding for community health centers. 

     Finally, the Bipartisan Budget Act suspends the statutory debt limit for the remainder of this calendar year.  The debt limit serves no independent fiscal purpose and has long outlived whatever utility it might once have had.  Members of Congress who believe they can credibly threaten to refuse to raise it nonetheless have been attracted to it as a vehicle for extorting others who fear disastrous economic consequences if the limit is exceeded.  The Budget Control Act of 2011 shows just how powerful and enduring the fruits of such extortion can be. 

     Prior to the Bipartisan Budget Act, the federal government was due to breach the debt limit by mid-March.  Many or most Republicans were expected to oppose a free­standing debt limit bill, making it difficult for their leadership to bring such a bill to the floor.  Most Republicans would vote for a debt limit bill with severe spending cuts, but some would not even then and Democrats were unlikely to provide the necessary votes for such a package.  Rolling the debt limit in with legislation raising the appropriations caps offered Members of both parties a way to avoid a crisis while not casting a vote specifically on the debt limit. 

     The budget deal does not include any extension of Deferred Action for Childhood Arrivals (DACA).  With congressional Republicans split and the President continually increasing his demands for a DACA deal, congressional Democrats simply did not have the leverage to insist on its inclusion in this package.  Polling showed that much of the electorate opposed provoking a government shutdown over DACA.  Although Democratic leaders insisted that last month’s shutdown was over other issues, so many Democrats were demanding a shutdown over DACA that the media largely ignored leaders’ denials.  Presidents Clinton and Obama managed to trigger government shutdowns purportedly over one set of issues to gain leverage over a very different set of concerns.  But it is far easier for Administrations to control public perceptions in such crises than it is for congressional parties with many voices, especially those in the minority, to speak with a unified voice.  The Democrats may have means of forcing votes on DACA, but a government shutdown is not it. 

     The big picture is that this deal is relatively small potatoes substantively.  In particular, it is almost trivial relative to the massive tax cut legislation enacted late last year:  it increases the deficit far less and is largely limited to two fiscal years (and does not change the long-term baseline).  It also moves the nation’s finances part-way back toward historic levels, in contrast to the tax bill’s movement away from historical norms.  The commentators insisting that this legislation makes the Republicans the party of spiraling deficits are one bill too late.  

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