As this is written, the country is embroiled in the discussion over the so-called “fiscal cliff” set to occur in early 2013. The discussion, of course, involves both taxes and spending at the national level, with various proposals that talk about budgets over a period of ten (10!) years. Many people find this discussion unsatisfactory and difficult to follow.
Why is this? Well, the reason is that the federal budgeting process is predicated on something they call “baseline budgeting”. This is the process that most entities (both business and government) honor and use, consisting of looking at the most recent history available for each budget category and then deciding what incremental percentage to use in increasing said annual budget for the coming year. Notice I said increasing, for it is almost never the case that such a process includes a decreased budget year over year. For the U.S. government, the budget process extends ten or more years into the future, and so when you hear of some sort of cut, you must, in most cases, mentally divide by 10 to get the yearly amount. What is worse, however, is that in the vast majority of cases, what politicians mean when they speak of a amount to be “cut” from a typical long-term baseline budget is that the amount in question is to be reduced from the increased amount already scheduled to be spent in that category. So, for example, if a cut is proposed to defense spending of, say, $ 600 billion, then that means only $60 billion per year against whatever the scheduled increase for that year was to have been. Say the base amount for year 1 is $ 750 billion, and the scheduled increase for year 1 is 9% ( = $ 67.5 billion), then the net result of the “cut” for that year is actually an increase in the budget of $ 7.5 billion to a new yearly total of $ 757.5 billion.
Given the above, I think it is safe to say that the average person listening to arguments about the fiscal cliff negotiations is at a severe disadvantage of not knowing how solid or valid are the numbers being bandied about, making a judgement about who is serious, and who is not very difficult. When you add this difficulty to the uncertainty over how much revenue is likely to result from any given tax increase or decrease, it becomes a fool’s game. On the revenue side, one can adopt either a “static” approach or a “dynamic”approach. Static, in this context, means that if your change tax rates, the new expected revenue is based on a simple projection of last year’s income figures in each bracket subjected to the newly revised rates, and summed up. The dynamic approach attempts to factor in expected changes in behavior by taxpayers that will almost certainly occur, e.g. raised rates result in increased tax avoidance strategies by taxpayers resulting further in revenue realized well below the amounts projected in the static approach, while lowered rates can result ( and historically have definitely resulted ) in larger than expected increases in revenue, primarily due to increased economic activity. This is not just my opinion; it can be verified from numerous sources, and most any economist will tell you so. Economics is not cut-and-dried math, it is all about human actions, human behavior.
It seems to me that one lesson to be taken from the above is that you cannot necessarily believe any assertions that are made on such grossed-up numerical arguments where the details about the existing, scheduled baseline budget increases are not known or revealed. The uncritical acceptance of these kinds of assertions may very well have been a large factor in voters’ re-electing the Democratic candidate in the 2012 presidential election. In particular, the insistence on what superficially sounds only reasonable—the idea of a “balanced approach” involving both revenue increases and spending cuts is in fact prima facie a deception, it seems to me, if the so-called “cuts” are of the type described, i.e. result in no net decrease in the yearly budget amounts ( or the entire 10-year budget) from their baseline values. To me this means that one party is being asked to accept tax rate increases without any serious concomitant spending cuts to achieve the so-called “balance”. One needs to expose all the details, but the supposed advocates of fiscal sanity refuse to descend from the most general level of detail in their discussions. It is my opinion that Republicans, who are supposed to represent opposition to fiscal imprudence, gave in to concerns some advisors offered about getting down to the details of a proposal, or as some have put it, getting into “the weeds”. There is a tremendous fear that the eyes of the audience will “glaze over” and its attention will be lost.
Instead, what should have been done, is that, immediately following a public discussion of the type described, Republicans should have followed up with one or more nationally broadcast paid “infomercials” lasting 10-15 minutes or more in prime time, laying out in detail, with good spokesmen ( e.g. Marco Rubio or Paul Ryan, or maybe even the eminent black economist Walter Williams) with good graphs, charts, and other such production values, showing why the Democratic proposals were flawed and even deceptive. This could even have been combined with a discussion of how the entitlement programs, if continued apace, will fail and when.
But, alas, the Republicans, as long as the establishment types are in charge, seem to be too wedded to the fears I have described above, or… it may actually be, are not really interested in educating their potential electorate because they only wish to convey the impression that they are the “fiscally prudent, small government” party, while actually wishing to carry on (political) business as usual…
Now there is another approach to budgeting, one which was developed in the private sector, called Zero-Based Budgeting (ZBB for short). This approach is the very opposite in philosophy from Baseline Budgeting in that each and every budget category (and/or sub-category) starts with an assumed budget of ZERO DOLLARS! The budget analyst then proceeds to build up the total budget by examining the functions and justifications for each department and expenditure with the goal of arriving at a suitable, yet minimum cost value for each category or sub-category. This work is typically exhaustive and intensive and requires a significant dedication of intellectual resources to achieve such results on a regular annual basis; this, among other things, has led to criticism of ZBB, particularly when used in the public sector.
What is most important to me is the total difference in mind-set implied by the two budget methods: one assumes that costs increase every year, hence let’s base our new budget on the old budget plus some increment, which increment is the only thing seeming to need justification while on the other hand the ZBB forces you to go through the entire justification and prioritization process in arriving at your number. I ask you, which approach favors the wastrel and the spendthrift? Which approach is better adopted when using OPM (Other People’s Money), i.e. government?
Harking back to our earlier discussion about the fiscal cliff, and about the loyal opposition’s presentation of budgets in general, ZBB represents a golden opportunity to apply a sensible approach that makes use of the Constitution’s several enumerated powers as the basis for justifying either (a) the inclusion/exclusion of, or (b) serious reductions in, various branches and departments of government depending on the degree to which you could, even by stretching things a little, connect it with one or more of those enumerated powers.
Using a ZBB approach, the Federal Budget would accordingly start at zero, and build up from there. Each branch or department or function would then have to justify itself. For example, one could argue for the retention and at least partial funding of the Department of Transportation on the basis that at least the Constitution envisioned the building of “post roads” and mentions them by name. The army is one of the institutions enabled by the enumerated powers, but what about the Air Force? It is nowhere to be found in the Constitution, while the navy is also mentioned. Yet, a reasonable extension of the concept of national defense being authorized allows us to include the air force as one of the armed forces to be funded. So, you can see where I am going with this, I hope.
Under this kind of mental supervision, there are clearly entire departments and functions of our federal government which do not in any sense qualify to be included at all in our national budget. Some examples would include the following cabinet-level departments:
- Housing and Urban Development
- Education
- Energy
- Labor
- Agriculture
Other departments which have functions which could conceivably be funded include:
- Health and Human Services ( CDC comes to mind)
- Veterans Affairs
- Interior.
And so on….
I have no intention at this point of arguing for or against any particular function or agency; I am merely trying to illustrate the broader principle, namely, that one needs to adopt a Zero-based type of thinking about government. One needs to say, for each existing entity that is funded, what would be the impact if this entity were to go away completely? For many of us, its disappearance would actually remove something negative in our lives, some unnecessary infringement on liberty. Those who will object will be those who, having lobbied for the policies in question, stand to lose some sort of advantage they have managed to obtain over the rest of us, e. g. large corporate entities frequently encourage additional burdensome and unneeded regulations over their industries so that smaller firms are discouraged from entering ( or possibly even persisting) as competitors, leaving the field to the larger, more prosperous companies, whose budgets can more easily cope with compliance issues.
One standard which is suggested by the ZBB approach rises almost to the level of a Bedrock Principle ( see my blog Page entitled Methodology). The principle is: if a function of government does not tend to benefit ( or at least provide a potential benefit) to all citizens generally, then its continuance should be in doubt. Examples of the functions which conform to this would be: national defense, Treasury Department, Federal Courts, the above-mentioned DOT and some agencies relating to infrastructure. Examples which most assuredly do not are the five departments mentioned above: HUD, Labor, Education, Agriculture and Energy. When I say its continuance should be in doubt, I do not mean to foreclose it completely, but let us say that it already would have one strike against it.
Another principle, which might constitute a second strike, is whether or not the function involves what are benignly called “transfer payments”, the forced expropriation of resources from one person in order to transfer them to another. As I have said elsewhere, and will continue to say again whenever the opportunity presents itself: taxation itself is a legalized form of theft, but if we have to tolerate some level of taxation to protect ourselves, then surely we must draw a line in the sand between those functions which deliver protection ( and maybe some other services) equally to all, and those which simply involve taking from some in order to provide for others; the reason for this is that it violates a fundamental moral side constraint, namely, that it is morally unacceptable for some people to use and/or exploit others for their own advantage. This applies to government actions that are sanctioned by some majority vote just as much as it would apply to the acts of an individual. In fact, the government case is altogether more serious because of its tendency to affect the entire society. Please see my Posts on Justice and Fairness for Robert Nozick’s discussion of moral side constraints.
Before continuing, I can already hear some of you out there saying, “but what about the General Welfare clause…” which is part of Article I, Section 8. Statists of all persuasions have made the argument that this language somehow overrides the enumeration of powers. There is not space here to deal with that assertion properly, but I will do so in good time.
* * * *
The ZBB idea can, and should be extended to other, non-monetary areas. One area that comes immediately to mind is regulation. The amount of regulation at the federal level alone is staggering—just see the volume of it which is published in the Congressional Register. I will not argue here why I believe that most, if not all, regulation could be dispensed with, so let us assume for this discussion that we might look at reducing the regulatory burden using ZBB concepts.
Conceptually, this would involve, I believe, taking each set of regulations for some given area of concern, and subjecting each regulation ( or related set of regulations) in turn to the same question I asked of the agency budgets, i.e. what would be the impact on people ( including both the regulated entities and everyone else as well) if said regulation ceased to exist? The authors of said regulations (usually bureaucrats of some sort) will jump up and down, saying each and every one must be preserved, they all had good reasons for coming into existence! As with the case of monetary budgets, there is a certain brutality involved in the drastic trimming that will likely be required, and the bureaucrats must be forced to justify each and every one.
Unlike the case with budgets, one can deal with each set of regulations separately, e.g. one congressional committee can take, say, environmental regulations and examine them over a period of time while allowing the existing regulations to stay in place while drafting an entirely new code from the bottom up in the ZBB manner. Congress could then repeal the agency’s authority, re-institute the agency in some form, and adopt the code of regulations as a body of law, which code could be changed legislatively from time to time.
The above-described procedure goes to the heart of the regulatory problem, namely that lawmakers restricted themselves to legislation which creates an agency and then empowers it to do rule-making, an undemocratic process which is both arbitrary and capricious; about the only remedy for bad rule-making is litigation, for which the issue of standing to sue is required and an enormous expense as well. In most, if not all, cases the agency which puts out drafts of proposed rule-making for public comment is under no obligation to make changes or rescind its rulings; the public hearings are simply window dressing for appearances’ sake. It takes a veritable storm of protest to move regulators off their determined course.
The answer, as I see it, is never to simply give an agency a regulatory charter which includes rule-making ability; the rules need to be codified and then passed as law by the Congress. I do not accept the argument that this removes the flexibility necessary to the agency to respond quickly to new situations; if lawmakers had standing regulatory committees for those few areas where regulations might be justified, then it would constitute some justification for having a full-time legislature, and might stem the flow of all of the new and unnecessary, unconstitutional output from our representatives. Such standing committees could meet several times a year to revise things as needed. Legislative review is needed as a substitute for the more arduous judicial review; also it provides the opportunity ( although seldom exercised ) to remove legislators who perform poorly at this task, whereas it may not be possible to remove judges for the same reason.
In the final analysis, what makes the Zero-based Thinking idea appealing to me is that it illustrates the radical nature of the solutions we need to move forward—it cannot be the case that a budget, once passed, becomes the baseline for annual increases forevermore, or that a regulation, once promulgated, stays there forever unchallenged. It has to be the case that one has the ability to simply do away with things that cannot be adequately justified. Zero-based Thinking allows us to do that in a reasoned fashion.
So the next time you hear some politician, especially some Republican politician who claims to be for reducing regulations, find out if he has any plan even remotely resembling the above process, i.e. a complete re-examination of all that has gone before and putting everything under the magnifying glass for potential elimination. I don’t know of anyone who even comes ( or ever came) close, not Reagan, not anyone. Yet, we can no longer tolerate the regulatory burden which now exists; just promising to put the brakes on the regulatory process going forward is not enough.
