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Sunday, March 19, 2017

Tweeted to distraction

The Trump administration has submitted its 2017 budget proposal. It is steeped in controversy including steep cuts in support for the EPA, Department of Education, The CDC, and the NIH.  Everyone's ox gets gored in this budget. We can quickly get into the weeds on this, discussing the specific merits of individual line items. While I believe that the wisdom of cutting funds for specific entities such as the CDC or NIH is simply more than dubious, these micromanagement decisions draw attention away from the bigger issues; that being why we are having this discussion in the first place.

The Federal budget is a mess and the dysfunction in Washington is a direct result of the structural issues with Federal spending. The historical perspective of across the isle collaboration existed because there was sufficient discretionary spending within the Federal budget whereby deals could be struck with specific financial resources linked to keep everyone happy. That has gone away because most of the money in the federal budget is spent outside the control of Congress. The net effect of the explosion of mandatory spending is there is no real reason to collaborate and every reason to play legislative chicken when there are fewer and fewer goodies which can be allocated and shared.

The projections of future growth of mandatory spending paint a rather bleak picture if one thinks that future collaboration across the isle are any more likely than the recent past. Mandatory spending is increasingly crowding out discretionary spending. The fastest growing segments of the overall budget are mandatory spending on entitlements and interest on the debt.

We have dodged this over the past 10 years for two reasons. First, we have run huge budget deficits which have allowed for both substantial growth of mandatory spending and support of flat discretionary spending. Second,  interest rates have hovered around zero which has allowed for growth of debt without substantial growth of interest payments.

The only discussions which are happening regarding spending cuts are touching upon the margins of the discretionary spending, which is less than 1/3 of total spending. We are likely to have huge political fights over these marginal items now, which in the not so distant future will be entirely irrelevant since growth in mandatory spending will all but crowd out everything that is truly discretionary.

The party is over. Interest rates are increasing meaning the carrying cost for the debt we have accumulated will, along with growth in Medicare costs, decimate discretionary spending. If the conflicts over cutting at the margins of the Federal budget seem nasty this year, just wait until the out years when the pie gets even smaller. Adjusted for inflation, discretionary spending in 2016 is smaller than any year since perhaps 2003. We could perhaps maintain flat discretionary spending with substantial tax increases for the short term. However, this approach runs a real risk of decimating any prospect of real economic growth and besides, it is only a short term work around. We will need to address the mandatory spending piece. There is no way around this.
Unfortunately, entitlements are not politically addressable. No one wants to talk about them. Smart people become blind when the subject is raised. Smart politicians remain in office by avoiding the conversation. The press corps are populated by smart and innumerate people, at least the ones who are employed.
I for one am not interested in hearing about anyone's specific beef about any specific budget item which will be slashed without a concurrent recognition that the inability to direct financial resources to good investments is part of a larger train running down a track to nowhere. Upset about federal $'s for the EPA - what about the bigger picture? Fill in any issue with any agency; NIH, Education, Agriculture... It does not matter whether you win the fight this year if you are blind to the inevitability of mandatory spending crowding out the remainder of the Federal budget.

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