The writers of this century-old law might not recognize how it is actually followed

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People who understand the importance of the federal budgeting process recently marked the 100th anniversary of the Budget and Accounting Act. That law set up the system by which presidents proposed budgets to Congress, which then deals with them. For one view of how the contemporary reality fits with how the law envisioned things,  Federal Drive with Tom Temin turned to former Congressional Budget Office director, now the President of the conservative American Action Forum Douglas Holtz-Eakin.

Interview transcript: 

Tom Temin: Dr. Holtz-Eakin, good to have you on.

Douglas Holtz-Eakin: Thanks for having me.

Tom Temin: And looking at the current budget situation we’re in with this 2022 budget proposal kind of cogitating in Congress that has come in from the Biden administration, plus a lot of cacophonous discussion of trillions here and trillions there that aren’t even part of the standard budgeting process, how would you rate the government’s adherence to what those 100-year-old lawmakers actually envisioned?

Douglas Holtz-Eakin: Well, I think we’re a long way from the original vision of the 1921 act, or even the 1974 Congressional Budget Act. In the 1921 act, the president proposed budgets, and Congress then took those and turn them into law. What we hear more than not these days is the president’s budget is dead on arrival. And so that’s not what the 1921 Act envisioned. And certainly the Congressional Budget Act envisioned that the Congress would pass a budget resolution in the House, pass one in the Senate, agree on the amount of spending and taxes and borrowing that would take place, and then set out to execute on that with a timetable and schedule. And we don’t see any of that either. So I’d say at this point, we’re really unmoored and adrift from a budgetary point of view.

Tom Temin: And the president and Congresses have always been politically oriented going back to the founding of the Republic. But it seems like in recent times, the budgets that are submitted by administration’s of Republican or Democratic, are much more political documents, statements of philosophy, somehow transmogrified into a budget, which in some sense, that’s what a budget should be. But they seem very far removed from just the day-to-day operation of the agencies, which have missions that predate whoever it is that submitting the budget for that particular year. So is that part of the problem?

Douglas Holtz-Eakin: I think that’s part of the problem. You could imagine a budget, which was a blueprint for what Congress could get done, and agencies could then execute on. And that would be a budget filled with compromises, small initiatives, things that are built on previous years’ efforts. But those aren’t vision statements. And so they don’t have the same political weight. Indeed, they would be compromised in some cases. And that would be viewed as abdication of the principle. So, administrations have gone away from presenting those. But that’s what a budget that would be a real proposal for what Congress should do. And that’s what it would look like. We don’t see that anymore.

Tom Temin: And the other issue that has come up since 1921, is we have Medicare, Medicaid, Social Security programs that those early Congresses could not have envisioned either. And those are now the spending related there too, to say nothing of the spending on federal debt service, which are way outweigh what they have as so called discretionary spending. Congress considers those vast areas of spending non-discretionary. But in the legal sense, they’re totally discretionary. How do you deal with that, latter 21st Century?

Douglas Holtz-Eakin: So one of the things that I think it’s worth noting is that whatever you thought of Congresses for the first 150 years roughly of our existence, their skills or ineptitude or leadership, or lack thereof, still managed to balance the budget on average. And then we invented entitlement spending, mandatory spending. And since then, we really haven’t balanced budgets. And so the original sin of budgeting is the automatic program that you don’t have to reconsider every year. You don’t have to defend its existence. You don’t have to change its course because of budgetary demands. It just goes on autopilot. And that’s where the big numbers are. They are in Medicare, Medicaid, Social Security and interest, which is certainly not a discretionary category anymore. No Congress, no administration has really come to terms with that yet. And, indeed, we’re seeing now the Biden administration proposed new entitlements, paid family leaves and child care and child credits. And I think it’s inevitable that there is going to be a moment of reckoning where we try to reconcile what we really can afford with what we’d really like to spend.

Tom Temin: We’re speaking with Douglas Holtz-Eakin. He’s president of the American Action Forum and former director of the Congressional Budget Office. And there’s always been the understanding that given the power of the dollar, and the sovereign stability, if you will, for lack of a better phrase of the United States, that the United States government can sustain a certain level of debt eternally. But to a lot of people it’s looking like really big and getting bigger and an accelerating rate – in terms of the ratios to gross national product, gross domestic product and so forth. Do you see that as something that Congress ought to maybe start thinking a little bit about?

Douglas Holtz-Eakin: I certainly would have hoped they’ve thought about it before now, but we are now at a point where the debt relative to capacity to produce incomes – GDP – is at the highest in our nation’s history. We used to say highest outside of wartime, but that’s no longer true. It’s just at its highest. And the real troubling part is that all of the projections show that spending outstrips revenue as far as the eye can see. So this is a debt that’s going to unsustainably rise and go north, and that literally can’t happen. So it will have to be dealt with by some Congress, now or in the future and I would think sooner would be better than later. The remarkable thing, Tom, is that, however bad you think the U.S. is, we are the best-looking horse in the world glue factory. And so when things get tough, and there are crises internationally, the money flows to the U.S. still, it’s still the safe haven. That’s a good thing. It allows us to carry more debt, but we can’t abuse that opposition in a way that undercuts it. That’s what I’m concerned about right now.

Tom Temin: And what would be the signs that that is beginning to wane, the idea of the United States as kind of a pillar of the world’s economic system and the pillar of stability?

Douglas Holtz-Eakin: Well, I think if you start seeing sovereign nations start to make their transactions in something other than the dollar, one should be concerned. And at the moment, the opportunity to do that would come with digitization of currencies. It’s inevitable that we’re going to have more digital transactions in our economy around the globe, that some of those will take place in digital currencies. And will it be a digital dollar, or will it be a digital renminbi? And if it’s the latter, that gives us less demand for treasuries, less demand for dollars and a tougher time raising the money – that would be one side.

Tom Temin: And what happens if the interest rates that the Treasury has to pay on the national debt, the debt service, starts to go into 2%-, 3%-type of range, and it’s near zero now, what effect would that have?

Douglas Holtz-Eakin: Interest is an increasingly large part of the spending of the federal government. In the current projections, over the next 10 years, the interest costs will become bigger than the difference between revenues and other spending. So it will be the source of the deficit. And that’s literally borrowing to pay interest on previous borrowing, that’s a dangerous thing to be doing. Interest rates go up by one percentage point, we get 2 trillion more in spending over 10 years. So the federal budget is hugely exposed to interest rate risk. And it’s not something that the U.S. can control. And conventional approaches to risk management would say that you want to minimize your exposure to that kind of a risk. And that means really curtailing the deficit spending that we’re seeing right now.

Tom Temin: And of course, the Congressional Budget Office is one of those places that has a lot of esprit de corps. And you’ve written about the idea of dynamic scoring of bills that Congress is considering, such as the infrastructure bill. And just review for us what dynamic scoring is and why CBO needs to maintain its drops in that ability to do dynamic scoring.

Douglas Holtz-Eakin: So first of all, scoring is the act of calculating the additional revenues or less revenues, the change in spending that will come into or go out of the Treasury, as the result of a piece of legislation, and CBO scores, everything that the Congress considers in the House and the Senate, to make the scores fair, they have to be done on an apples-to-apples basis. And that means that the CBO, makes an economic projection and then freezes it, and then looks at the current law and how the law would be changed and produces a score. Dynamic scoring is the unfreezing of that economic projection. There are some bills, where the whole point of the bill is to make the economy grow more rapidly. And that was true in the 2017 tax bill, that would be true of the infrastructure bill they’re constemplating right now. The whole idea is to improve the productivity in the future, raise wages and the standard of living. And if you do that, then you will also raise additional tax revenue. A dynamic score takes into account that additional growth and additional tax revenue that you’ll receive, it’s a sensible thing to do. And you want to tell the Congress the best possible information about the implications of the legislation that they’re contemplating. Dynamic scores do that. They just don’t come up very often, like when you’re renaming post offices, there’s not much at stake and you just don’t need to do it. It’s a big undertaking you do for special occasions.

Tom Temin: And it sounds like the algorithms that are used to determine the dynamicism really need to be tweaked quite a bit and checked against what actually happened over a period of, say, a year, five years, 10 years.

Douglas Holtz-Eakin: Certainly, and CBO will look not only at their own estimates of what happened, they will go out and look at the research literature and develop estimates based on the consensus in the literature, not just their instincts. They want to have this grounded as much as possible in the science and the facts. And often you’ll see CBO publish reports on the impact of safe federal infrastructure spending. That’s the result of them doing their due diligence, keeping track of what the literature is telling them about infrastructure. And so they share that with Congress so that going into the legislative process, they have some idea of what they might expect.

Tom Temin: All right and one last time, then just review for us what a budgeting process that adheres to what was envisioned in the 1921 budget act and the 1974 revision to that would look like, right now as we are, say, sitting here in July.

Douglas Holtz-Eakin: The first week in February, the president would submit a budget and then Congress would have the CBO analyze that budget and tell them what they think it does to spending and revenues. The House and the Senate would then mark up and pass budget resolutions. If they didn’t match, they would get together, produce a conference agreement that did match and pass that in both the House in the Senate. They would then set out to do the appropriations – annual appropriations of discretionary spending that match that budget resolution. If the budget resolution called for mandatory spending changes or tax changes, the committees of jurisdiction will do those. All of it would be wrapped up by Oct. 30 and with a big bow on it and you turn to the next year. We just don’t do that anymore. We don’t see 13 different appropriations bills go through. We see big continuing resolutions and omnibus bills and nothing that looks like the timetable. It’s July, we don’t have a budget resolution in either the House or the Senate. So we were a long way from the original vision of the Budget Act.

Tom Temin: Douglas Holtz-Eakin is president of the American Action Forum and former director of the Congressional Budget Office. Thanks so much for joining me.

Douglas Holtz-Eakin: Thank you.

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