DAVID MALPASS:The Obama Budget’s Economic Message
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The president proposes more debt and bigger government, despite ample evidence that the approach doesn’t work.
Presidents use their budgets to set priorities, make choices and provide leadership. Budgets are one of the most important tools for guiding and managing a large, complex organization.
The White House budget released Wednesday was a disappointment not just because it doesn’t balance and is too late to matter, but also because the budget doesn’t lead or inspire private-sector confidence. The message is that the government wants to grow (spending would rise 60% from 2012 to 2023) and wants the private sector to pay for it (revenues would more than double, up 113%, yet still not enough to stop the deficits).
The U.S. government is already the biggest spending and borrowing machine the world has ever seen. America can’t do well without restraint—an aging nation yearns for better choices in government spending, not more taxes.
To prepare the country’s finances for slower growth in the labor force and the retirement of millions of baby boomers, what is needed is an administration that makes more spending choices and shows that there is a process of restraint. Waiting for a grand compromise on taxes or entitlements will take too long. The best federal programs should be augmented, and the less necessary ones wound down, with the net result that the massive buildup in federal debt can be reversed relative to GDP.
EPAA staffer with the Senate Budget Committee distributes copies of the president’s new budget.
At its core, the Obama budget argues for bigger government and more debt. The proposal leaves gross debt at more than 100% of GDP in 2020, and the budget would require Congress to raise the national debt limit beyond $25 trillion. Those provisions alone make the budget unsalable to small businesses, to markets, and even to Senate Democrats.
If the Obama budget had shown a commitment to steady spending restraint, there would have been a huge growth payoff. Milton Friedman showed that government spending causes the private sector to expect more taxes and to reduce investment and hiring accordingly. The budget ignores that critical insight, claiming instead that huge increases in government spending are investments that add to GDP growth without regard to the national debt.
The country already faces a gross national debt of $17 trillion and a marketable debt of $12 trillion. (The difference is that the Social Security and Medicare debt in their trust funds is not marketable). The national debt would increase to $19 trillion in 2023, but the administration is low-balling the problem. The president is asking for a 10-year deficit of $5.3 trillion, $744 billion in 2014 alone. To hold it down, the White House budget uses the rosy assumptions of very fast real GDP growth (3.6% in 2016) and a surge in taxes ($3.6 trillion in 2016, up from $2.45 trillion in 2012). Interest rates are assumed to stay impossibly low (1.2% in 2016) compared with inflation (2.2% in 2016) and nominal GDP growth (5.6% in 2016).
These expectations are simply not realistic. The economic recovery continues to be much slower than normal, which makes restraint in the growth of spending all the more urgent. Apart from recessionary years, 2012 saw the weakest nominal four-quarter growth rate, 3.5%, since World War II (the growth rate was only 1.7% in real terms). The argument that more government spending or bigger fiscal deficits are needed simply doesn’t make sense, given the weak economic growth that followed the massive spending and Federal Reserve stimulus of recent years. The real median household income has fallen over the past 13 years, and especially in the past five years—a loud argument against current policies.
Rather than making spending choices, the president’s proposal turns more of the budget over to auto-pilot. Entitlements would take up 62% of the $47 trillion in 10-year spending.
The U.S. Constitution requires that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law,” but almost two-thirds of the budget would be spent without votes and with no accountability. The lack of political accountability for debt is the genesis of the spending crisis that is sinking Europe and nearly sank Britain in the
the years before Margaret Thatcher’s strong leadership.
Making matters worse, the current Washington process now relies on static continuing resolutions that lock in Clinton- and Bush-era priorities rather than updating the budget. Government programs are frozen in time even though the world is moving much faster from one invention to the next.
As commander in chief, the president is obliged to use the budget to guide procurement, coordinate foreign aid, and provide for the national defense. Almost all of this critical leadership has been lost in the Obama administration. The president’s budget now proposes that defense spending decline from 4.3% of GDP in 2012 to 2.4% of GDP in 2023, leaving no room for emergencies.
The budget also understates the needs for the maintenance of existing infrastructure and the development of true defense and nondefense investments around the government. While it alludes to tax reform and proposes tax increases, the budget should do more to guide the tax debate by laying out the president’s views and launching the legislative effort. Instead, by proposing a small-ball entitlement reform—a chain-weighted Consumer Price Index that, by some estimates, would save only $150 billion over 10 years in spending cuts and revenue increases—the Obama budget may actually energize the opposition to the point that it undercuts any genuine entitlement-reform effort.
The president’s budget should have eliminated more programs, downsized others and instructed the cabinet departments to allocate their limited funds more efficiently. It should have narrowed the differences between the already-passed House and Senate budgets in the hope of restoring a more normal budget process, which is vital to efficient governance. As it stands, the Obama budget is mostly a protest statement: too little revenue coming into Washington, too much sequester.
Mr. Malpass, a deputy assistant Treasury secretary and legislative manager for the 1986 Tax Reform Act in the Reagan administration, is president of Encima Global LLC.
A version of this article appeared April 11, 2013, on page A17 in the U.S. edition of The Wall Street Journal, with the headline: The Obama Budget’s Economic Message.
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