Why US fiscal policy needs to change

Gene Steuerle's latest book, "Dean Men Ruling," shows issues with the US's current fiscal policy. But the problem is bigger than fiscal policy and more about the country's lawmakers, writes Gleckman. 

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 21^st  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.