Saturday, July 9, 2011

How about a "real" baseline for spending?

One of the great frustrations in arguing about government spending is that everything government does is expressed relative to a baseline and, every time that government changes its mind about something, the baseline changes.  Since government is always changing its mind about things, the baseline is always changing, making it very difficult to understand what you are actually comparing a particular outcome to.

In addition, the whole notion of a baseline doesn’t really make a lot of sense when it varies all over the place.  To give you an example, when President Clinton submitted his 1994 budget, CBO projected spending growth of 3.4% per year as the “baseline”.  This in a period where inflation averaged between 1.5% and 3.0%[1].  In 2011, the CBO projected spending growth of 5.1% with inflation pegged at 1.8% for the entire period.[2]  Thus, the baseline is highly variable period to period and unrelated to the inflation or population in any particular way.

Rather, the baseline reflects what government would grow according to various agencies if government were simply to keep doing what it was doing without any focus on efficiency at all.  There is generally nothing in the assessments of baselines to suggest that any particular outcome driven by the government can be done more efficiently; nor is there any sense that income constraints exist.

The analogy of comparing government to a family can be heavily overstretched but I believe it can be used for this purpose.  Government baseline budgeting is the equivalent of a family budget that assumes that the family will buy exactly what it bought the previous year regardless of the change in costs on those items or the amount of income the family brings in.  It makes no assumption about the need to increase costs or the constraints that should be placed on those costs.

Over long periods of time, this has terrible consequences for the restraint of government spending.  As a thought experiment, imagine the following.  Imagine you created a new budget.  Under this budget, government spending would increase at the rate of inflation plus the rate of population growth.  Even this approach to government spending baseline probably creates more spending than is truly necessary as it assumes that all government spending should grow as the country gets larger.  In some areas (the justice system might be a good example), you could argue this is a reasonable assumption.  In other areas (national defense), you could argue there is no reason for more people in the country to require higher costs to defend the country.  Rather than arguing at the line item level however, let us just use this notional “baseline” to do some quick calculations.

Let’s imagine that starting 40 years ago, in 1971, we were to have adopted this new notion of budgeting.  How much would government spend today if it had adhered to this level of spending?  The answer is shocking.  In the year 2011, under this formula, spending would have been $1740 billion, a full $1.9 trillion dollars less than the $3629 trillion currently forecast by the government.  Our current $1.6 trillion dollar deficit would be a $300 billion surplus.[3]  Or, said in even starker fashion, the “excess” spending over our imagined budget since 1971 is $28.2 trillion (in 2011 dollars), more than twice the current national debt.  And from 2011 to 2021, this excess spending increases by another $25 trillion dollars (in 2011 dollars)

But some might say that this is an unfair comparison.  After all, we are in the middle of a great economic crisis that requires the government to spend more.  Without commenting on the merits of this assertion, let’s account for it by running the analysis out further.  Let’s take the analysis to the year 2021, when, at least by the forecasts we have, the current crisis should be long over.  Our baseline from 1970 would say that we should spend about $2.3 trillion in 2021.  Our actual spending in 2021 is projected to be $5.7 trillion or fully $3.4 trillion higher[4].  The problem, after the crisis, is actually getting worse instead of better.

Now others might say well but going all the way back to 1970 is unfair.  After all, the government does a lot of things today that it didn’t do in 1970.  So let us adjust the assessment once again.  Let’s use 2000 as the starting point for our assessment.  Doing the assessment this way, our spending in 2011 would have been a full trillion dollars lower in 2011 than it is forecast to be and $2.3 trillion lower in 2021 than the current forecasts suggest that it will be.

But calculations about the past are just that, calculations about the past.  What does this approach tell us on a looking forward basis?  Well, let’s imagine we used the 2010 spending number as our starting point.  Some might argue that this number is too high as it includes the spending we are currently doing to fight the recession but let’s again use it as a starting point just for this exercise.

Were we to hold government to this new baseline of the growth in population plus inflation, starting from 2010, our spending in 2021 would be $4.6 trillion.  The current projection of the President’s budget is $5.7 trillion for the year 2021 or $1.1 trillion dollars higher.  This $1.1 trillion is more than $2500 for every American in 2021, or more than $5000 for each person of working age.  Said differently, relative to the President’s 2012 budget, spending would be $4.8 trillion lower over the next 10 years than is currently projected.  The entirety of the savings that are currently being debated relative to the debt ceiling could be obtained if we simply held government spending to the growth rate of inflation plus population as opposed to executing the President’s most recent budget proposal.

Ultimately, the political process needs to decide what level of efficiency or inefficiency it requires from government.  That said, a baseline based on a desired level of efficiency is a much more useful baseline than one that changes at the whim of policy makers.  We must ask policy makers to decide how we want government to operate…do we want it to operate based on spending whatever it takes without any constraints (the current approach) or do we want to ask it to have a baseline based on becoming more efficient over time.  The rest of the world and all of us in our jobs are required to become more efficient.  Asking government to be ever so slightly efficient seems a very modest request.

[3] In point of fact, the surplus would be higher than $300 billion because interest payments would be lower than currently projected because less debt would have been created in the interim.
[4] Ibid

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