Paul Ryan Gave Away the Sequester, Along With Fiscal Discipline
With the clock quickly winding down on the legislative year, Congress has cobbled together a budget deal, something they have failed to do since April 2009. The details have yet to be finalized, but many are praising it as a return to regular order, ending the budget brinksmanship that has dominated Washington for most of Harry Reid's tenure as Senate Majority Leader. Unfortunately, the budget deal breaches the spending caps created under sequestration-the only measure of fiscal discipline that has made it through Congress in recent years-in exchange for promises of budget cuts down the road.
Rep. Paul Ryan (R-Wis.) and Sen. Patty Murray (D-Wash.) led the process to broker a deal-a process established in the agreement that ended the recent government shutdown. Current reports suggest that the deal will include spending levels of just over $1 trillion for the fiscal years 2014 and 2015. Spending caps are currently $986 billion for 2013 and will be reduced to $967 billion in 2014, more than $30 billion below the numbers for the Ryan-Murray budget deal. Importantly, this is discretionary spending, and for 2014, most of the cuts will come from defense. So the Ryan-Murray deal would beef up discretionary spending and make it even more difficult to address excessive spending on defense.
Many in Congress claim the boost in discretionary spending is more effective fiscal policy than the arbitrary and damaging across-the-board reductions in spending mandated by sequestration. In reality, the budget deal abandons the only mechanism that has limited federal spending in the 113th Congress. In fact, sequestration provided an opportunity to address politically charged fiscal decisions on defense spending, giving cover to members of Congress who could point to sequestration as the reason for the cuts. Instead, the budget deal appears to be creating another round of short-term spending increases for some promise of spending cuts at some point in the future.
At the same time, it is difficult to identify economic harms created by sequestration. The latest jobs report was better than expected, with unemployment dropping to a five-year low of 7 percent. Growth in gross domestic product accelerated by 3.6 percent in the third quarter of 2013, and, according to the Federal Reserve, household net worth increased to $77.3 trillion in the third quarter-$1.9 trillion higher than at the end of the second quarter. While the economy clearly continues to struggle, things are moving in the right direction. Sequestration has little effect on the underlying economic fundamentals one way or the other, but it does have political implications for a Congress seeking to spend more money.
Public choice economists have long noted that self-interested behavior by political actors may not generate the beneficent outcomes that self-interest generates in the private sector. In a market setting, the selfish pursuit of profits requires providing goods and services that create the best value for consumers. For politicians, the strongest incentive is re-election, which requires a combination of votes and resources. Typically, the easiest way to acquire both is to provide benefits to constituents and businesses. Earmarks for projects in the home district and subsidies for supportive businesses require discretionary spending, precisely the spending targeted under sequestration. But note that political actors are not using their own resources in this process. Rather, they collect $2.8 trillion in revenue from taxpayers, which is then allocated to those groups and individuals chosen by Congress.
The political incentive to spend while avoiding tax increases voters do not like has created a culture of spending in Washington that thwarts almost every attempt to restore fiscal discipline. The Ryan-Murray budget deal does nothing to tackle the $17.3 trillion federal debt and offers only promises to address the mounting costs of entitlement spending. Which is why some House members are wary of a budget deal. Reps. Mick Mulvaney (R-S.C.), Jim Jordan (R-Ohio) and Steve Scalise (R-La.) are circulating a letter urging House leadership to pass a budget at the current sequestration level of $967 billion. While the $30 billion or so difference between sequestration and the budget deal may seem small, the debate is much larger. It is about maintaining the only source of fiscal discipline that has emerged for some time in Washington. Real spending cuts, however small, should not be traded away for promises of sweeping reforms sometime in the future.