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Neil H. Buchanan

Discipline for Government Spending: Mr. Boehner Offers the Germ of a Promising Approach to Budget Reform


Friday, August 27, 2010

Recent reports show the economy to be losing any traction that it might have gained in the past year or so, as the 2009 stimulus bill winds down. Even so, the discussion in the Capitol is not about putting the millions of Americans who are unemployed back to work. Instead, politicians continue to be obsessed with the federal deficit, with many of them bizarrely claiming that cutting the deficit is the best way to help the ailing economy.

There is simply no reason to believe such claims, making it especially difficult to find good news in lawmakers' discussions about possible legislative responses to the ongoing economic downturn. It was, therefore, a pleasant surprise to find at least the core of a good idea in a speech that John Boehner, the House Minority Leader, delivered earlier this week.

Mr. Boehner, according to news reports, included the following suggestion in his remarks in Cleveland on Tuesday: "I think we should go through every line item in the budget and ask ourselves if the spending is so important we are going to ask our kids and grandkids to pay for it. And if [it] doesn't meet that test, then why in the hell are we doing it."

In this column, I will discuss why Boehner's suggestion contains a basically good idea, why the suggestion is nonetheless misleading and incomplete, and how to expand upon the idea in ways that would improve economic policymaking in this country. Properly done, such an expanded approach could make it much more difficult for politicians to hijack the policymaking process through pure demagoguery about the deficit -- the type of demagoguery, in fact, that Boehner has otherwise made his stock-in-trade.

The Budget, and Our Children and Grandchildren

The core idea expressed in Boehner's speech is to assess whether each item on the budget "is so important we are going to ask our kids and grandkids to pay for it." This suggests that there might, in fact, be items on the budget that are so valuable that it is acceptable to purchase them with borrowed money. And there are, indeed, a large number of such spending possibilities for the federal government.

For families, of course, there are plenty of things that we buy with borrowed money, and for good reasons. We take out mortgages because we believe that a house is worth owning, even if we have to pay interest to do so. Parents take out loans to pay for their children's college educations, because they know that the benefits (both financial and personal) of higher education justify borrowing that money. Debt, no matter how much we might vilify it, is a normal and valuable part of life. It can be abused, but it makes it possible for us to live better lives.

For a national government, borrowing can also create long-term benefits for its current and future citizens. The westward expansion of the United States -- the building of canals, railroads, highways, ports, and so on -- was financed with borrowed money. It was possible to fight and win World War II because we were willing to substantially increase the national debt. When a disaster hits, the federal government responds with emergency funds, all of them borrowed.

No one would think that the people who made those decisions to borrow and spend were harming their children and grandchildren. In fact, quite the opposite is true. Done correctly, spending borrowed funds on projects with long-lasting impacts on the economy can raise living standards today and in the future.

The Rest of the Story: Paying for Spending on Today's Needs

Admittedly, this reading of Boehner's speech might give him too much credit. His general record of public statements, after all, does not indicate that he believes that the government can ever do anything good for the country. While his role as leader of his party in opposition might require him to emphasize partisan attacks over reasoned analysis, there is nothing in his history to suggest that Boehner is a deep thinker -- or, indeed, that he is capable of, or inclined to offer, nuanced policy proposals.

For example, during the debate over last year's stimulus bill, Boehner (whose district is in Ohio) offered the following nugget: "Tell me how spending $8 billion in this bill to have a high-speed rail line between Los Angeles and Las Vegas is going to help the construction worker in my district." This is such an absurd argument that it can only be explained as the statement of someone who was trying to say something -- anything -- negative about his opponents' proposal.

Of course, that particular rail line will not directly help Boehner's constituents, but not every government project must have an impact on every congressional district. In fact, Boehner's position suggests that the only reason a Member of Congress should vote for anything is when it directly helps his constituents -- exactly the opposite of the position Boehner takes against "pork-barrel spending" and earmarks (at least, when Democrats engage in those things). Moreover, spending overall helps the American economy overall, and thus helps every American -- including construction workers in southwestern Ohio. Boehner should know this.

Although Boehner's speech in Cleveland this week was billed as a major policy speech, it was still the work of a politician on the attack. (For example, the headline coming from the speech was Boehner's suggestion that President Obama fire his entire economic team for failing to fix the economy in his first 19 months in office.) It might, therefore, miss the point to criticize Boehner's remark for stopping short of a fully-formed policy suggestion.

Even so, the idea that we should only spend money on those items that can be shown to help our children and grandchildren is seriously misleading. The government must also spend on projects that have current importance but no substantial long-term impact, such as air-traffic control, anti-crime activities, and all of the day-to-day matters that make up the bulk of the federal budget. Taking Boehner's suggestion seriously would require that we simply stop funding, for example, the FBI.

A more sensible approach is to set the level of current taxes so that we can pay for the government's programs that have only current impact, but to borrow to finance those projects that have a longer-term impact. This is hardly a radical suggestion. Well-run businesses, almost all state governments, and nearly every major national government worldwide all divide their spending into "current" and "capital" items. This is generally known as "capital accounting." A standard accounting rule forces the government to collect sufficient taxes for the current items, but allows capital items to be financed with deficit spending.

Allowing the Federal Government to Use Modern Accounting Techniques

Why has the U.S. never allowed its federal government to adopt so sensible (and so uncontroversial) an accounting method? The short answer is that people like Boehner have howled at the idea that the federal government should be permitted to borrow money, as a capital budget would allow it to do. Denunciations of "accounting gimmicks" accompany any attempt to redefine the federal budget by correctly separating current and capital spending items, with dark suggestions that unscrupulous Members of Congress will abuse the system to justify pet projects for their home districts without paying for them.

In a draft article that I recently completed for publication in law reviews, I suggest a way out of this trap. In a sensible political system, it would be possible simply to instruct the relevant budgetary agencies to adopt a capital-budgeting system and to apply it, using current professional accounting standards. In today's world of hyperbolic political rhetoric, however, it seems that the only way to move forward is to raise the profile of a capital-budgeting system, moving the decision-making from the level of government accountants to an independent board of experts.

As I suggest in my article, such a board of experts -- I tentatively suggest the name "Growth Budgeting Board" -- could be designed to insulate the budgeting process from manipulation. The board could identify projects with long-term benefits -- like funding for cancer research, improvements in transportation networks, and early-childhood education -- from those that should not be financed with borrowed funds. Congress would still be free to fund non-capital items, of course, so long as it raised the funds to pay for them on a concurrent basis.

Such a system would also be able to sidestep another problem raised by Boehner's suggestion to scrutinize "every line item in the budget." We need not allow obvious winners (like programs to prevent health problems in infants and young children) to become hostage to an endless process of determining whether each and every dollar that the government spends belongs on the current or capital account. Instead, the Board would be able to identify the most obviously promising programs first, allowing Congress to approve those projects without waiting for the verdict on other items. So long as a spending project has not been blessed as being on the capital budget, it would remain subject to the pay-as-you-go requirement.

What About the Short Run? Disciplining Spending During Recessions

Finally, we must not allow a focus on our long-run spending possibilities to prevent the government from dealing responsibly with recessions. The proposed board could also be given the responsibility to identify spending that is temporary and stimulative, and that therefore can be expected to be most cost-effective in fighting an economic slump.

In fact, if the board could put in place a list of possible future projects that would count as either capital spending or temporary anti-recessionary spending, then it could avoid problems like the one that arose last year, when Boehner and others said that too many of the proposed spending projects were not "shovel-ready." (It is worth wondering today, of course, whether it might have been a very good idea, back in early 2009, to put in place job-generating projects that would have been just coming on line over the next few months, as millions of people still search in vain for jobs.) The shovels can be ready if we plan more carefully in advance of future downturns.

It is possible, therefore, to put in place a politically-insulated agency that could assist Congress to make responsible spending decisions, both in the short-run and in the long-run. We should put reasonable safeguards and presumptions into such a system, to prevent it from giving the green light to irresponsible borrowing. We should not, however, continue to operate as if there were no responsible ways to use deficit spending to fight recessions and invest in the long-term health of the economy. There clearly are.

Under our current system, it is a matter of certainty that the government's budgeting procedures cause us to do the exact opposite of what Boehner sensibly suggests: spend money on those items that will benefit future generations. Politicians who are genuinely concerned about improving the budgetary process, rather than scoring cheap partisan points, should be interested in getting the process right.

Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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