Why Obama's Budget Was DOA This Week
In my Forbes column I look at why Obama’s budget was DOA this week (and why all presidential budgets have been for a long time and will continue to be).
On Feb. 1 President Obama sent his budget for fiscal year 2011 to Capitol Hill, where it promptly disappeared after a brief flurry of news reports. Republicans are keen to claim that the virtual disappearance of the president's budget from view signals a dissatisfaction with his priorities. In fact, it is simply part of a long-term trend that has been going on for many years.
It may surprise people to learn that throughout most of American history there was no budget at all, at least not in the sense that we use the term today. Up until the Civil War Congress handled all the budgeting. Monies were appropriated to the executive branch for various purposes and it had the responsibility of spending them. At the end of the year the various agencies totaled their spending and someone on Capitol Hill added it up. That was the budget.
Remarkably, this system worked for a long time. In fact, the federal government ran surpluses most of the time. Deficits primarily resulted from wars, and strenuous efforts were always made to pay them off as soon as possible afterward. On those occasions when the Treasury needed to sell bonds, each individual bond issue had to be specifically authorized by Congress.
Before the Civil War virtually all taxing and spending decisions were handled by the Ways and Means Committee in the House of Representatives and the Finance Committee in the Senate. But the huge expansion of spending during the war required some division of labor. Committees on appropriations were established in both houses. Eventually other committees were established as well to provide oversight of federal spending.
The president remained a relatively passive participant in the budget process. Federal agencies normally submitted their budgets directly to the relevant congressional committee. But as federal spending continued to rise, especially during World War I, it was felt that this ad hoc system needed modernization. The war also led Congress to give the Treasury authority to sell bonds and set their terms on its own, subject only to an overall limit.
The Budget and Accounting Act of 1921 created a Bureau of the Budget in the executive branch to coordinate budget submissions by various departments and agencies. The same legislation also created the U.S. General Accounting Office as part of the Legislative Branch in order to audit federal books and prevent fraud. A few years later the Joint Committee on Taxation was established in order to advise both the Finance Committee and Ways and Means Committee, owing to the increasing complexity of the tax law after institution of the federal income tax in 1913.
The Budget Bureau was originally part of the Treasury Department, but it moved over to the White House in 1939. In 1970 it was renamed the Office of Management and Budget (OMB) to indicate a broader responsibility for managing the federal government as well as preparing the budget.
An important change occurred in 1974. Richard Nixon was desperately trying to cut federal spending to help keep rising inflation in check. In doing so he made extensive use of something called impoundment, which basically acted like a line item veto. If the president didn't want to spend money for something appropriated by Congress, he just didn't.
Congress, which was heavily dominated by Democrats, was furious with Nixon, believing that withholding appropriated funds was unconstitutional. To resolve the issue and reinstate congressional primacy on budgetary measures, Democrats drafted an impoundment control bill, which would make it unmistakably clear that the president was required to spend every dollar appropriated by Congress exactly for its stated purpose. The president could ask Congress to rescind budget authority for projects he deemed to be unnecessary or wasteful, but Congress was not required to vote on rescissions and most requests were simply ignored.
Although the Democrats had the votes to restrict impoundment, they were eager to have bipartisan support for their efforts because Nixon was expected to veto the legislation and Republican votes would be needed to override. Republican leaders believed that a big reason for the budget deficit was that Congress dealt with the budget piecemeal--spending was considered separately from revenues and each spending bill was considered in isolation from the rest of the budget.
Republicans and many budget experts as well thought that if there was a point in the legislative process where Congress had to consider the budget in its totality then it would be easier to get it under control. The bipartisan Congressional Budget and Impoundment Control Act of 1974 created a new budget process in which budget totals are debated and capped in a budget resolution that is supposed to be enacted before the appropriations committees begin their work for the year.
The Budget Act made some other important changes as well. Historically, the government's new fiscal year began on July 1. But with the necessity of passing a budget resolution before the beginning of the appropriations process it was decided that more time was needed and the beginning of the fiscal year was moved to Oct. 1. Among other things, this left a transition quarter that was not part of any fiscal year, which continues to confound budget analysts to this day.
It also became clear that if the new congressional budget process was to work then Congress needed its own budget estimates. Historically, Congress had gotten estimates for the cost of new programs from OMB, which gave the president enormous power through his monopoly on budget data. Thus, as part of the Budget Act, Congress created the Congressional Budget Office (CBO) to crunch its own numbers.
As it turned out, Republican votes weren't needed to pass the Budget Act. By the time it reached Nixon's desk he was weeks away from resigning over Watergate. Consequently, he was so weakened politically that Nixon decided against getting into a fight with Congress over impoundment and signed the bill even though he was signing away a lot of presidential power at the same time. Every president since has regretted Nixon's action.
The loss of impoundment authority has led to a proliferation of earmarks and congressional micromanagement of the budget. Partly as a result, Congress has found it increasingly difficult to finish its work on time each year. To prevent departments and agencies from shutting down, it enacts continuing resolutions allowing them to continue spending at the previous year's budgetary level.
Ironically, the portion of the budget over which Congress actually has meaningful control has fallen sharply over time. In 1970 the discretionary portion of the budget--those programs and operations subject to annual appropriations, was 61.5% of all spending. The rest consists of mandatory programs like Social Security, Medicare and interest on the debt that are not subject to annual appropriations. Their spending is automatic and cannot be reduced just by appropriating less money to them. In 2009 the discretionary portion of the budget was down to just 35.2% of spending.
Given all these changes in the budget process, the president's budget has been greatly diminished in importance. Whereas it was once the necessary starting point for all budget discussion, since that was the only place the numbers even existed, now it is just one proposal among many. Congress tends to rely exclusively on the CBO for all its budget numbers and analysis. Although departments and agencies are supposed to adhere to the president's priorities, they do so only half heartedly.
Nevertheless, the media still maintain the fiction that the president's budget is something meaningful. Journalists dutifully report that the president is slashing such and such program, freezing spending or giving the go ahead to some headline-catching initiative. But at the end of the day the final budget has little if anything to do with the president's priorities. Congress mostly decides how the money will be spent and lobbyists probably have more to say about it than OMB does.
But the big fact about the federal budget is that more and more of it is effectively on automatic pilot; neither Congress nor the president have anything so say about it. If you take all the earmarks, unnecessary weapons systems, waste, fraud and abuse and everything else you can think of that deserves to be cut, it still adds up to drops in the ocean compared to Social Security and Medicare. As long as those programs are off limits the president's budget will continue to decline as a matter of political and economic importance.