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Douglas Holtz-Eakin And His New Budget Math

21 Sep 2010
Posted by Stan Collender

If you're over 40, you may remember the television show "That Was The Week That Was" that aired on NBC in the mid-1960s and which in many respects is the great, great grandfather to "The Daily Show."  One of the best songs done on that show by Tom Lehrer, a satirist/songwriter who appeared frequently, was called "New Math." For any parent who lived through this new way of doing basic arithmetic that was being introduced at schools across the U.S. at the time, it was painfully funny.

See if this video version doesn't have you laughing and wincing all at the same time.

It was hard for me not to think of "New Math" as I was writing my "Fiscal Fitness" column for this morning's Roll Call.  As the column explains,those who ask us to just do the math when talking about reducing the deficit are leading us down the same path Tom Lehrer blazed more than four decades ago.  In particular, keep remembering this line from the intro to the song: With new math, "The important thing is to understand what your doing rather than to get the right answer."

 
More Than Just Math Needed to Get Right Deficit Reduction Answer
Sept. 21, 2010
 
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.
 
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.

 

In fact, an H-E sort of

In fact, an H-E sort of exercise works very well as a demonstration of the difficulties inherent in budget balancing. I have seen it used that way in the past, and I'm just a casual observer of the budget process, so I assume others have seen it too. Any chance that was H-E's actual goal? Get people to realize that making up a plan isn't the same as selling it, so isn't enough to reduce the deficit. Seems to me a lot of people who are attempting to enter Congress right now need to be told just that.


Seems like a cheap shot

I don't know how long the guy had for his speech or what he said in anticipation of the points you make. But it's way too easy and also fundamentally inaccurate, to say, we can't develop a fiscal plan until we reach a consensus on what things we want to finance. That could only be true in a world of infinite resources to pay for "the things we want". In the real world, we can't have all the things we want. Your post's approach is just one of postponing dealing with that reality. A consensus on something unpleasaant, i.e., to have less than we want won't form until it has to. We need some kind of a fiscal plan to force people to make tough decisions among the things they want when they can't have all of them. Only that way will we find out what the consensus is. So his work is a step in the right direction, that of financial reality. Don't fight it.


People can easily support a

People can easily support a plan to balance the Federal budget if they don't see the affects on government services and capabilities. How meaningful is that kind of support? The point of the post is that plans to balance the budget must also include a picture of the type of federal government (in terms of services and capabilities) that will result from these plans. I think this is good point.


More Support for Spending Than Balance

We seem to have vastly more people in this country with strong opinions about what they feel should NOT be cut than people with strong opinions on concrete steps to reduce the deficit. They don't want defense, Social Security, or Medicare cuts. They scream about earmarks but back off once you tell them that they include aid to Israel and certain veterans' benefits. And they whine that they are paying too much in taxes.

We have a somethin' for nuthin' culture in this country where the importance of what we want is valued much more highly than how we pay for it. We are quickly becoming Greece.


New Budget Math

If we have to have agreement on what we don't want, then the process is finished before it starts. Everyone wants free money. No one wants their free money to stop.
My business made substantial reductions on the cost side several years ago, in the face of falling demand for our services. We continued to do what we always had done, but we did it with less resources, and that included very substantial reductions in compensation and benefits at every level of the enterprise. Everyone who stayed was expected to work a lot harder.
That's a start.
Any other ideas?




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