How “Dead Men” Fiscal Policy Is Paralyzing Government

By :: May 13th, 2014

In his new book, Dead Men Ruling, my Tax Policy Center colleague Gene Steuerle delivers a powerful indictment of the current epidemic of irresponsible fiscal policy. But Gene isn’t writing about deficits and today's economy.  His focus is on the long-term political, social, and economic consequences of mindless budgeting that increasingly functions on policy autopilot.

Gene’s argues that for short-term political gain, lawmakers have abdicated the future. They have made it almost impossible for government to adjust policy to reflect changing circumstances. Congress—often aided and abetted by the White House--spends prolifically (both directly and through the tax code) to subsidize current consumption, leaving few if any resources for new opportunities. The future is being written by lawmakers who will be long dead when our grandchildren come of age.

“We are left with a budget for a declining nation,” Gene writes, “that invests ever-less in our future…and a broken government that presides over archaic, inefficient, and inequitable spending and tax programs.”

All this has happened due to a confluence of two unhappy trends: The first is what the late conservative writer Jude Wanniski memorably described almost four decades ago as the “Two-Santa Theory.”

Wanniski’s insight was that Democrats had monopolized the role of Santa Claus by identifying themselves as the party of new government programs while budget-balancing Republicans played the unpopular role of Scrooge. Now, it was now time for Republicans to rebrand themselves as the second Santa, only instead of distributing generosity through spending, they’d do it through the tax code.

No longer would the party of largess be pitted against the party of austerity. Now, American politics could be defined as a battle between two forms of munificence. His observation came to define both GOP political success and fiscal policymaking for decades to come.

But Gene says it isn’t just that Democrats want to spend more and Republicans want to cut more taxes. It is the way they do it.  More and more fiscal policy is designed to be permanent and out of the effective control of the lawmakers who create it.

On the spending side, more of government is in the form of entitlements—permanently growing and immune from the process of annual congressional budget review.

Similarly, spending in the form of tax subsidies often lives a life exempt from the tough trade-offs that come from the once-routine but now forgotten need to balance revenues and expenses.

As Gene notes, there is nothing immutable about tax cuts or even entitlement spending. Congress could repeal tax cuts or redesign programs such as Medicare and Social Security. But in the current political environment, it won’t.  Just watch the ongoing game over 50+ tax “extenders.” These subsidies are temporary and open for review every year or two. Yet, time and again Congress mindlessly restores them with no serious debate.

The reason is the classic prisoner’s dilemma. Lawmakers (some of them anyway) know they’d benefit from a political grand bargain where Democrats agree to reduce spending by restructuring the big mandatory programs and Republicans agree to raise new revenues by slashing tax subsidies.

But, as we saw in the 2011 budget fiasco, neither side can bring itself to act, largely because it doesn’t trust the other.

While Gene is one of Washington’s most respected policy economists, Dead Men Ruling is not an economics treatise. In this book, he mostly focuses on what this policy means for the ability of 21st century America to govern itself.

Gene concludes Dead Men Ruling with a set of sensible budget process reforms, such as requiring Congress and the president to periodically renew entitlements and tax subsidies and obligating the president to propose and Congress to enact a budget that is projected to be balanced over the course of a business cycle.

But what are the incentives for that to happen? After all, lawmakers now represent congressional districts that overwhelmingly favor a single party and whose voter bases are driven by issues such as protecting Social Security or opposing anything that looks remotely like a tax increase. They are increasingly beholden to a relative handful of single-issue benefactors with unlimited financial resources and, thanks to recent Supreme Court decisions, almost unlimited ability to support candidates willing to do their bidding.

Much of what Gene writes is true, but the problem is bigger than fiscal policy. And it won’t be fixed without political reform.

 

 

5Comments

  1. AMT buff  ::  12:17 pm on May 13th, 2014:

    Anyone who has read Mancur Olson or Jonathan Rauch knows that our system is structurally incapable of avoiding this result. I doubt that even a Congress of saints could reverse what Rauch calls demosclerosis. Any sufficient structural change would be anathema to one or both parties.

    History shows us that this process of paralysis and decline, with ever-expanding control of the economy by the government, can continue for a century or more. Consider Argentina, once one of the world’s richest countries. Or pick any other South American or African country.

    History also shows us that there is a chance for at least a temporary cure. The price is high: economic if not physical devastation of the country. This devastation burns down the forest and lets seedlings grow without interference. The forest becomes new again in a remarkably short time.

    The big question is whether the recovery will resemble 1950’s West Germany or today’s Argentina. That will depend on what Americans ask of our politicians.

  2. Michael Bindner  ::  2:15 am on May 14th, 2014:

    The dirty little secret in Washington that everyone knows is that we are in gridlock because a large percentage of the Republican caucus, especially in the House, either believes or represents their constituent’s belief that a President with an African father should get nothing in terms of legislation – even if it were in the interest of those oppossing him. Of course, just when you think that this issues goes away in 2015, the likely election of Hillary Clinton will have the same result.

    Are there things we can do? Hope that Clinton brings in a Democratic House majority. We will have good governmet for at least two years if not six or eight. Indeed, as the people who reflexivly oppose Obama and Clinton die off regular partisan give and take will return to the norm.

    More radical solutions I have already mentioned – replace income and payroll taxes for most with a Value Added Tax and a VAT-like Net Business Receipts Tax(a VAT with offsets like the insurance exemption and the child tax credit) – with an employee payroll tax retained so that individual income can be tied to beneifts (although I am willing to give this up and give every beneficiary the same check). An income and inheritance surtax would remain and it would be dedicated to funding overseas military deployments, sea deployments, net interest payments and a paydown of the debt. Once the debt is gone and troops are no longer deployed, the surtax sunsets. That last bit is what will make it attractive to the rich. Maybe then they will quit funding such insanity as the Tea Party.

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  4. AMTbuff  ::  3:14 pm on May 14th, 2014:

    Michael, take some advice from Mark Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

    Opposition to President Obama is ideological, not racial. Otherwise Herman Cain could never have become so popular among Tea Party types. One’s political opponents have different opinions but they’re not evil. It’s intellectually lazy to believe that the other side is malevolent.

  5. The Dead, the Devices, and the Errors  ::  2:01 am on May 16th, 2014:

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