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Wil Levins Event to be held at Max's Seafood Cafe
65th Annual Cape May Autumn Birding Festival

Weekly Basket: Matrix Budget

Volume XVI No. 37: September 16, 2011

In The Matrix, Morpheus could have been describing the government's budgeting rules: "some of them can be bent, others can be broken." While not dodging bullets or bending spoons, there are a lot of gimmicks that lawmakers employ to make objects appear smaller than they actually are. These can end up costing taxpayers dearly.

Last week the deficit reduction "Super Committee" started meeting, and it is clear that the effectiveness of the Committee will be depend partly on how they interpret the rules. A key point discussed was the baseline -- the predicted amount of spending and revenue for the next ten years and the resulting deficit. The Committee's goal is to cut that baseline deficit by $1.2 trillion.

Simply put, how much you actually cut depends on where you start. The Committee needs to start with a realistic projection -- not ignore that absent significant changes, certain programs are going to be funded each year, Medicare payment cuts to physicians aren't going to materialize, certain expiring tax cuts are going to be extended, and future squishy savings from efficiency and targeting waste, fraud, and abuse are more vapor than substance.

The baseline is not the only place where the budgetary funhouse mirrors come into play. The Super Committee is using a 10-year budgetary window, but different deficit reducers will have different effects inside and outside of that window. For example, the tax cuts of 2001 and 2003 were phased in over several years, so the revenue loss in the first ten years is far smaller than it will be in the second ten. You can do the same thing with spending. On the flip side of the coin, there are reforms that can have a much greater effect outside of ten years. Small, phased-in changes to entitlement programs may not take effect for years, but could significantly improve our long-term budgetary picture. Even though these won't count against their $1.2 trillion deficit reduction target, the Committee should pursue these reforms. 

Another gimmick: the convenient fiction approach. Even though it's clear that we are going to have to bail out the Post Office to the tune of billions, its current independent structure enables Congress to ignore that cost while stymieing reforms the Post Office wants that may help its bottom line. Or, in the case of the last highway bill, ignoring reality and assuming that gas tax revenues would magically jump to pay for all the extra spending crammed into the legislation. Fact, not fiction, needs to rule the day.

And of course, there is the budgetary fig leaf, where you mask the size of the problem. Years ago Congress looked at then-surpluses in the Social Security and Medicare trust funds and came up with the unified budget that made the size of deficits less noticeable, further enabling budgetary imbalance.

It is not just the Super Committee that could be engaging in budgetary distortions. The President's new jobs proposal recommends the creation of anational infrastructure bank that would use federal loan loans and loan guarantees to leverage private investment in a variety of projects. These types of funding instruments have proliferated in part because budget scoring rules make them appear cheap -- the liabilities aren't accounted for in the budget. But in reality the taxpayer is on the hook if the loan goes bad. A recent beneficiary of another loan guarantee program, the solar energy company Solyndra, went belly-up, and Uncle Sam may be out nearly $600 million because of it. The same program is making other high-risk bets in nuclear energy projects -- risks Wall Street wouldn't even touch when they were going gaga over junk mortgages. 

Let's be clear-eyed about one thing: we are staring at a $14 trillion debt. It took a lot of creative budgetary wizardry to help us get to this point. We know it won't be pretty when our eyes are open to the real costs of what we expect government to do. But we cannot afford the budget gimmicks and games. To the Super Committee and all of Congress and the Administration: we want the truth. We can handle it. 

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