More Than Just Math Needed to Trim Deficit

Posted September 20, 2010 at 3:47pm

Former Congressional Budget Office Director Douglas Holtz-Eakin last week presented an interesting but ultimately futile proposal for the federal budget debate ahead. I can’t argue with Doug’s numbers: If you accept his assumptions (I don’t, but that’s another story for another time), he’s come up with a proposal that mathematically does, in fact, add up to a balanced budget by fiscal 2020.

[IMGCAP(1)]But math has never been the problem when it comes to reducing the deficit. Anyone who has ever looked at the classic pie charts of federal spending and revenue knows how to calculate the across-the-board reductions it would take to eliminate the red ink. They also know how to change those numbers if they decide up front that some spending should or has to be treated in a certain way or that revenues should be held to a certain level. Doug did that well, but that’s all he did.

What Doug didn’t do was explain the dramatically altered vision of the federal government his proposal asks Americans to accept. He didn’t show what the reductions would mean for individuals, businesses, industries and investors. And he didn’t describe the budget impact of economic downturns, natural disasters, foreign policy or military problems, or any other significant contingency that would require higher spending or result in lower revenues than his assumed baseline.

Doug ended his presentation to the National Economists Club with a simple question: Did anyone think Congress could adopt this plan? My response was that I could definitely see it being translated into a new budget process and passed. I immediately added, however, that it was unlikely that this new budget process would ever accomplish what it promised. I predicted that, like the Gramm-Rudman-Hollings and the Budget Enforcement acts, it would die ignominiously amid partisan recriminations about who should be blamed for its failure.

The reason? Supporting a mathematical formula is relatively easy; voting for the actual changes in spending and revenues that match the formula doesn’t ever play well back home.

Doug got the mathematics right but the analysis wrong. For the numbers to be meaningful, they have to follow rather than precede a consensus on the most fundamental questions about the country. Working backward by starting with the math but skipping agreement on the country we want (or are willing to accept) makes the whole exercise into an analyst’s dream and a politician’s nightmare. The numbers become almost meaningless because they likely will never be implemented.

For example, Doug’s proposal implies a 25 percent reduction in all appropriated programs, including military spending. But it’s not at all clear whether that can be done without significantly reducing both what the Pentagon is now doing and what we expect it to be able to do. The viscerally negative reactions of Virginia officials to the changes in the military budget recently proposed by Defense Secretary Robert Gates demonstrate the problem. Even though the change wouldn’t hurt U.S. defenses, self-professed deficit hawks in the commonwealth are having a great deal of trouble supporting the proposal because it means fewer facilities and employees, lower profits for some corporations and the possibility that some companies in the state could go out of business.

There’s also no indication that Doug’s numbers are based on a national willingness to accept a smaller U.S. role in world affairs, as his defense spending cuts imply. A smaller role may, in fact, be what some want. But a question must be answered before the numbers can be taken seriously: Is there enough consensus to guarantee the policy would be continued should the president and Congress refuse to consider some type of military action in the future because deficit reduction was previously deemed to be a higher priority?

The same is true for domestic matters. Doug’s numbers show a substantial reduction in mandatory spending, but without a consensus that Medicare should do or pay less, they are just numbers. Similarly, unless farmers agree in advance that Washington shouldn’t support crop prices because the federal government shouldn’t be subsidizing business, projecting a drop in price support is meaningless. And if corporations won’t agree that the budget should no longer provide them with certain tax benefits, Doug’s budget math on the revenue side is just an empty promise.

This situation is not unique to the federal budget. Anyone who has ever put together a business plan knows it’s easy to put numbers on a page; what’s difficult is justifying them beyond a hope and a prayer. That’s why any deficit reduction plan that starts with or is based just on the math — whether it’s produced by the Bowles-Simpson deficit reduction commission, a former CBO director, a deficit reduction group or anyone else — should be immediately criticized for assuming things that can’t be assumed. It should then be sent back to the drawing board, or in this case the spreadsheet, for reworking.

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.”