How Do You Budget Objectively in a Political World?

Posted June 14, 2010 at 6:28pm

I was wrong when I said in the June 1 Fiscal Fitness that zero-based budgeting hadn’t been a topic for polite conversation since it was tried in Washington, D.C., in the late in 1970s. At almost the precise time that I was writing those words, Georgia, which first tried it when Jimmy Carter was governor almost four decades earlier, was considering legislation to reimpose ZBB.

[IMGCAP(1)]ZBB’s comeback in Georgia was short-lived. In spite of a good deal of support from his own political party and pressure from tea partiers who thought it was the way to fiscal nirvana, Republican Gov. Sonny Perdue vetoed the ZBB bill last week, saying he saw no reason to devote state resources to a budget process that proved to be completely unworkable the last time that it was used. As a result, it now appears that ZBB once again has been relegated to a footnote in budget history and a topic that will be Googled less and less as time goes on.

Three days after Perdue’s veto, CNBC host Jim Cramer and Sen. Tom Coburn (R-Okla.) talked on air about another topic that seldom makes it even to the back burner, let alone the front, of most federal budget debates: They wanted to know why the government wasn’t locking in the relatively low interest rates by borrowing more in the long term instead of in the short term. They admitted that doing this would cost taxpayers more over the next few years. But they also said this strategy would save money in the future because federal interest costs will increase when the existing short-term securities are refinanced at the higher rates that they said were likely.

These two seemingly unrelated topics — ZBB and federal borrowing costs — actually have one very important thing in common: They are both based on the faulty assumption that, even though it is done in a highly political and increasingly partisan environment, budget decisions somehow can be based on undisputed or indisputable facts and figures.

To say the least, that’s anything but the case.

ZBB is a great example. As I said two weeks ago, when it was tried in Washington, ZBB was based on an assumption that all federal activities could somehow be objectively ranked from highest to lowest priority and that those that fell below a certain standard would be dropped. It’s a great theoretical concept, but it ignores the very basic fact that most programs can’t be evaluated on strictly numerical terms and, even if they could, many federal activities simply are not comparable. For example, how do you compare veterans benefits with highway building, or commodity price supports with the research done by the National Institutes of Health?

Relying on numerical rankings assumes that the numbers assigned to these activities will be accepted without question. That may have been a presumption for the public policy schools that began in the late 1960s and early 1970s (full disclosure: I proudly have an advanced degree in public policy), but we now know that there are almost always competing analyses by the different sides in political battles in general and budget debates in particular that make that kind of analysis impossible in reality. If that weren’t the case, we wouldn’t have Republican and Democratic pollsters and there would be no dispute over whether revenue estimates should be based on static vs. dynamic modeling.

The same is true of evaluating the best way for the government to borrow. In theory, it absolutely is a legitimate question: Why doesn’t the government do what a prospective homeowner is supposed to do by taking advantage of the generally lower long-term interest rates when they’re going to be in the house for more than a few years?

Like the evaluation of programs for ZBB, the answer is that the budget impact is only one of a number of considerations. For example, the mix of short- and long-term securities used by the government is based not just on how it wants to borrow, but also on how the market wants to lend. While the mix likely could be changed somewhat, a big switch to long-term borrowing would likely be met by resistance — and higher rates — from bond buyers.

In addition, as we’ve seen for decades, elected officials typically think in the
two-, four- and six-year time frames during which they will be judged by voters, and they are typically more motivated by the need to show a lower deficit during those periods than by an ability to reduce costs over the 10- to 30-year period typical of longer-term borrowing. Like a homeowner who is only planning on being in the house for short time, many administrations take actions knowing that they will only occupy the White House for the next four or eight years. Because of that, it’s not hard to understand why short-term borrowing that reduces current costs is often seen as the better alternative.

Like ZBB, every once in a while someone suggests some objective way for the federal government to come up with the mix of short- and long-term borrowing that would minimize federal interest payments. For example, Lloyd Bentsen, President Bill Clinton’s first Treasury secretary, made headlines when he suggested that the federal government re-evaluate the maturities of what it borrowed to lower spending. Bentsen stopped talking about it, however, when Wall Street heavily criticized his plan.

None of this is to suggest that objective analysis isn’t critical when it comes to federal budget decision-making. But it’s just as critical to remember that what appears to be objective often isn’t and that objective assessments typically are only one of the factors in the decisions that have to be made.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.”