Federal Fiscal Policy: Seeking Balance

[Originally written Fall 2007]

Federal fiscal policies are inextricably linked with the Nation’s economic health. They have a double importance, providing the basic blueprint for governmental action and connecting the private and public sectors of the economy in order to forge a constructive, coordinated effort to attain and sustain prosperity and aggressively tackle national problems. The importance of the federal budget has grown immensely with the emergence of new economic complexities, the multiplication of national and societal challenges, and the intensification of public expectation for constructive action to address pressing national problems. Thus, the irrefutable importance of federal fiscal policy necessitates that these policies be wisely crafted, with great consideration of their economic ramifications, assurance of maximum efficiency in their implementation, swift abolition or amendment of failed policies and bold action in the face of emerging needs and challenges. Regrettably, the necessity for such policies has been largely ignored in favor of political expediency for elected officials and fulfillment of inadvisable demands by special interests on the right and left—the former advocating a small government regardless of need and the latter an expansive government regardless of cost. America’s economic prosperity and indeed longevity depend upon prioritizing the national interest above the parochial interest and abandoning ideological doctrines in favor of balanced fiscal policies that serve the primary objectives an economically and socially secure society: full employment, widespread opportunity, sustained prosperity and budgetary balance.

The nation’s economic policies were outlined statutorily in the Employment Act of 1946 (the “Act”), which declared that it is “the continuing policy and responsibility of the Federal Government to use all practicable means… to promote maximum employment, production and purchasing power.” Since the federal budget constitutes government’s most vital tool for action on any level, it logically follows that the government’s fiscal policies must serve the purpose of meeting these objectives. Fiscal policies thus must respond to new economic realities and social phenomena; they must be conducive to sustained prosperity and effective in meeting new challenges. It is proper to assume that the goals put forth by the Act are objectionable to few; the disagreement, which often but not always stems from basic political ideology, is how they can best be achieved. Since 1946 the pendulum has swung back and forth between those who favor expanded government intervention in the nation’s economic affairs and those who advocate laissez-faire capitalism. Eleven administrations and twenty-two Congresses have passed, each with their own unique fiscal objectives and ideological entrenchments. Unfortunately, few have approached budgeting with the moderation and prudence that is required to achieve the Act’s most basic objectives. Indeed, the constant struggle between supply-siders and welfare statists has produced a system seemingly inept at responding to new economic realities and challenges, and what has emerged, by virtue of some perverse indirect compromise, is a government budget that runs on auto-pilot, with little amendment or control exerted each year. There are, of course, exceptions, but the general trend for the last sixty years has been economic and fiscal policies rooted in ideology rather than reality, and this places this Nation in a precarious position today. Government expenditures rise rapidly each year; indeed, spending is never cut, and even efforts to reduce the rate of growth of spending meet staunch opposition from special interests. The result is a government budget that is destined to grow unceasingly, regardless of necessity with little attention paid to efficiency and an appalling lack of prioritization. Americans are fiscally conservative in theory, constantly railing against “wasteful pork-barrel spending,” but in practice, there is no limit to what government can spend, for what may seem to be wasteful to some may not to others. It would not be fair to blame politicians alone for the challenges we face today--the citizens must share a fair portion of responsibility. A new fiscal policy is needed for the old ways, if they have ever been effective, will certainly not do today. Flexibility should supersede ideology; need should trump desire; moderation should override extremism. The complex nature of the twenty-first century economy and the grave difficulties facing twenty-first century society demand a government that can keep pace. A liberal approach toward the welfare of America’s people and a conservative approach toward the expenditure of their money are most desirable. There is no need for conflict between a progressive, compassionate government and an efficient, fiscally responsible government. Such a government can exist. Such a government is needed now.

Government fiscal policies must promote national strength, economic progress and individual opportunity. Its revenue system must be made less burdensome, more equitable, and more conducive to economic expansion. Its resources should be put to use in tackling national challenges and removing obstacles, some new and some old, to the achievement of the greatness this Nation is capable of achieving. Its policies must be reflective of the compassionate nature of American society, responsible to human needs and committed to alleviating misery here and around the world. Its operation must be efficient, always concerned with achieving the greatest possible outcome at the least possible cost and ever-mindful of its responsibility to judiciously spend the tax dollars of its constituents. These are basic objectives that often seem to conflict, but a responsive government can achieve each successfully. It has been done before. It must be done now.

Federal expenditures should be soundly justified. In budgeting each year, the federal government generally begins with the prior year’s authorization and proceeds to add to it. This is a grotesquely inefficient way of doing business, and any sustainable business or family budget would certainly review its existing expenditures periodically when planning for the future. Government should do the same. The “auto-pilot” system of budgeting should be abandoned in favor of zero-based budgeting, which was standard practice until the late 1960s and was reintroduced in the Carter administration only to be abandoned by subsequent administrations. In zero-based budgeting, each year the government would start at zero and justify all expenditures. This would allow for the prioritization necessary for a government that is to constructively meet the basic objectives outlined in the Employment Act of 1946 and the more specific tests put forth in the previous paragraph. It is conceivable that this system would precipitate a substantial reduction in federal expenditures, for it would open up programs currently free from scrutiny to intensive review. Even if no reduction is possible, at the very least this system would contribute immensely to the effort to ensure maximum efficiency in the discharge of governmental responsibilities and enable government to proceed with the legitimacy and goodwill necessary to tackle the nation’s problems and fulfill its constitutional and statutory responsibilities, including those put forth in the 1946 Act.

Budgetary balance should be the overriding goal of fiscal policy. In any successful financial enterprise, borrowing is often a necessity, but government borrowing has reached new heights and the perils associated with ever-expanding public debt are evident. While businesses borrow money for a specific purpose--expansion or modernization--and responsible individuals borrow in times of emergency, government presently borrows hundreds of billions of dollars each year simply to keep itself operating. Prior to 1980, budget deficits, while persistent, were generally much smaller as a share of the overall budget and each year tended to fluctuate upward and downward. Beginning in 1981, budget deficits consistently rose until by 1992 the national debt had quadrupled from 1980 levels. In twelve years, a Republican administration and a Democratic Congress quadrupled a debt that took 190 years, 40 presidents and ninety-six Congresses to build up. I note the parties involved to illustrate that, contrary to empty rhetoric on both sides, fiscal irresponsibility enjoys safe refuge in both the Democratic and Republican Party establishments. Following a brief three-year period of budgetary balance, deficits began to emerge in 2001 and the public debt has doubled since then. Proponents of government borrowing--either for the purpose of financing new spending or tax reductions--will assert that individuals and businesses rely on credit and thus government is perfectly justified in doing the same. This is oversimplifying the issue. No business or individual could rely so heavily on credit and expect to survive. If businesses and individuals borrowed as government did, they would be bankrupt. Consistently borrowing large sums of money to finance an operating budget is the height of fiscal responsibility and indicates the true gravity of the fiscal situation the Nation now faces. Indeed, government currently borrows money to service existing debt. It is a vicious cycle that must be stopped. Borrowing costs taxpayers hundreds of billions of dollars each year in debt service expenses, and worst of all, is morally repugnant in that it saddles future generations with mountains of debt that they had no hand in creating.

Keynesian economics argues that government must, in periods of economic distress, make investments that will jolt the economy back to satisfactory performance. The argument offered here--that reduced government expenditures and less borrowing are generally preferable--would seem at first glance to be inconsistent with this principle, but then one would have to assume that all government expenditures are justified. It is demonstrable that this is far from true. Once again, during periods of distress, the focus of government’s investments must be shifted. The “fat” must be cut out. There is little justification for excessive borrowing or increases in spending during such periods, particularly when waste and abuse are so prevalent in federal operations. When economic circumstances change, government policies must reflect that change and public dollars must be invested accordingly. Prioritization, while difficult and sometimes politically inadvisable, is in the long run better for the nation than endless borrowing and unchecked spending growth.

The fiscal policies advocated in this paper are best epitomized in the records of three presidents: Harry S. Truman, Dwight D. Eisenhower and William J. Clinton. All three men had their own ideological perspectives, but their overriding concern was for the economic health of the nation. They understood the connection between fiscal and economic health, and in their respective administrations they approached budgeting with the moderation and responsiveness necessary to pave the way for steady economic expansion, sizable investment in public welfare and human capital improvement programs, and minor budget deficits or balanced budgets. Truman, while favoring increased spending, only did so when fiscally and economically advisable. Many of his proposed programs--aid to federal education, universal health insurance--were largely self-financing, and those that weren’t were offset by reductions in other budgetary expenditures. Eisenhower, while ideologically-inclined to push for broad tax reductions, only did so when fiscal conditions allowed for it. Clinton, favoring targeted tax cuts and investments in essential, progressive government programs, offset his proposals with corresponding cuts or revenue enhancements. Clinton, Truman and Eisenhower, respectively, presided over the slowest average annual rate of growth in federal spending in the last sixty years. During these administrations the Nation achieved considerable social progress and attained sustained economic prosperity. This is no coincidence; it is a vindication of the wisdom of prudent budgeting.

Budgetary policy has been hijacked by ideology. Expenditures are approved annually without justification. Tax cuts are advanced without regard to economic considerations. Excessive tax reductions and spending increases are not rooted in sound economics but rather in ideological doctrines. For supply-siders, no tax cut is too large or unnecessary; for liberal welfare statists, no government program is too expensive or flawed. This is not a condemnation of one group of ideologues--it is a condemnation of blind ideology itself. As long as the Nation’s economic policies are guided by ideology rather than reality, its potential will go unfulfilled and its fiscal policies will continue down this embarrassingly reckless path. The cases of the three administrations mentioned previously demonstrate that a progressive, compassionate government committed to achieving sustained economic growth and social progress is not inconsistent with the basic tenets of fiscal discipline. Those who approach budgeting from a perspective of pragmatism rather than ideology will serve themselves and the Nation well. It is time to make fiscal responsibility a reality rather than a political talking point. The decisions associated with this objective will be difficult, but the long-term economic vitality of the Nation demands that they be made.