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Once Again with the “Jobs” Bill: When Does the “New Era of Responsibility” Begin?

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Once Again with the “Jobs” Bill: When Does the “New Era of Responsibility” Begin?

June 11, 2010

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The Obama Administration entered office proclaiming a “New Era of Responsibility” in its first submitted budget, where it outlined its fiscal blueprint for the federal government. The President’s budget message decried the irresponsibility of past budgetary practices, and heralded a new era in which fiscal responsibility would reign.

As the Congress now considers yet another deficit-increasing, budget-busting spending bill, one must ask: when will those who now control the Executive and Legislative Branches of the federal government begin to take responsibility for containing the ongoing spending binge?

According to the Congressional Budget Office (CBO), the latest version of the so-called “jobs” bill before the Senate will increase spending outlays by $126 billion over the next ten years, and add $79 billion to the federal deficit during that time. Over the first five years, the deficit effect is starker still: of the $109 billion in new spending in these years, $103 billion would be added to the deficit. Most of the partially-offsetting tax increases under the law would become effective only later.

The bill is thus primarily a borrow-and-spend-bill, with some tax-and-spend thrown in. But it is, in all respects, a bill that piles still more spending on top of current historic highs.

This is not how it was supposed to be. In June, 2009, President Obama urged Congress to enact statutory “pay-go” restrictions, enshrining the principle that new spending initiatives should be fully offset by other spending cuts or new taxes rather than adding to the deficit. The entirety of his statement was:

"The ‘pay-as-you-go’ rule is very simple. . .Congress can only spend a dollar if it saves a dollar elsewhere. This principle guides responsible families managing a budget. And it is no coincidence that this rule was in place when we moved from record deficits to record surpluses in the 1990s – and that when this rule was abandoned, we returned to record deficits that doubled the national debt. Entitlement increases and tax cuts need to be paid for. They’re not free, and borrowing to finance them is not a sustainable long-term policy."

Congress later did enact such a pay-go law, fostering several statements of self-congratulation from Democratic Party leaders. But there has yet to be any indication of intent to abide by the principles articulated in the President’s statement.

Consider the budget maneuvers contained in the Senate’s “jobs bill”. According to CBO, the bill would worsen deficits in the on-budget accounts by $85 billion. The bill’s sponsors would evade pay-go requirements in two ways: first, through a loophole previously inserted in the pay-go law, which explicitly excludes higher payments to Medicare physicians from the pay-go law and allows them to be deficit-financed – in this case, to the tune of $22 billion. Second, the bill would simply designate the remaining $63 billion in spending (unemployment insurance, Medicaid and other assistance to states) as “emergency” spending. Voila! The force of pay-go is thereby annulled.

Times are tough and many have their hands out to the federal government, begging for assistance. No one should be surprised that physicians don’t want a 21% cut in payments per service, nor that cash-strapped state governments should desire more federal funds. But displacing those financial pressures to the federal books and financing them with debt does not eliminate them. How to finance such payments is precisely the sort of tough choice that the pay-go rules were allegedly there to enforce. The pay-go rules mean nothing if they are simply discarded whenever Congress and the Administration face a budgeting challenge.

Defenders of the deficit-spending in the “jobs” bill assert that the bill cannot have a positive effect on near-term economic growth if its costs are offset. But this assertion simply highlights several internal contradictions in the statements of those voting for “pay-go” rules while simultaneously piling up the deficit spending.

First, as with the large stimulus enacted in early 2009, much of the spending in this bill has nothing to do with facilitating near-term economic growth, and everything to do with bypassing long-term budget restrictions. Of the current bill’s more than $25 billion for “infrastructure incentives”, nearly 90% wouldn’t be spent until 2013 or later. If a project in 2019 is worthy of federal investment, it should be prioritized ahead of other federal spending at that time. Today’s recession doesn’t justify deficit-spending a decade away.

Similarly, the bill’s deficit-financed $22 billion payoff to Medicare physicians is clearly not being done for the purpose of economic stimulus. It is, instead, simply an artifact of previous misleading claims that health care reform would save money – claims that rested upon the assumption of an immediate 21% cut in payments per physician service. Those arguments of deficit reduction couldn’t be made if physician payments were increased in the health care bill itself, so provisions to do so have been moved into this one.

It is ironic – at the very least – to assert that these higher physician payments must now be financed with deficits, given that they have been moved into this legislation only because of claims that health care reform would not add to the deficit. Surely, the persistent claims of the fiscal prudence of health care reform should weigh against deficit-financing of higher physician payments rather than argue for it.

And, as we have noted earlier, the bills’ treatment of the so-called “tax extenders” is a budgetary farce. The tactic of repeated short-term extensions disguises the true budgetary impact of persisting tax policies, while simultaneously undercutting any positive behavioral incentives they might otherwise provide.

There is a compelling argument to be made for countercyclical federal spending in the face of recession. This argument has been persistently undercut, however, by the details of legislation developed in the 111th Congress. The 2009 stimulus bill – $862 billion in additional spending – allocated over half of its appropriations spending to occur in the years 2011 and beyond. Such a policy is consistent with evading long-term budget restraints, and inconsistent with fostering near-term economic growth.

There is no exact science in determining the right amount of deficit spending during a recession. This much, however, we do know: the current deficit is close to $1.5 trillion, and is also at a post-world-war high as a percentage of GDP. That’s a lot of stimulus already. We also know that pay-go requirements are being routinely evaded for the purpose of enacting spending that has nothing to do with near-term stimulus.

Incredibly, even now, there are indications that the Senate intends to add still more spending to the package – specifically to restore further benefits for the unemployed, and to provide physicians with a full three and a half years of deficit-financed payments. For those now in charge, no level of spending ever seems to be enough.

When President Obama made his June, 2009 speech extolling the virtues of “pay-go,” it was much earlier in our economic recovery process. He nevertheless still opined then on the importance of the pay-go principle.

Things in the economy were supposed to have been much better now. If a fresh new dose of deficit-spending is now in order, then either the previous deficit-spending binge didn’t restore our economy, or (more likely) the backers of “pay-go” requirements were never serious about it.

The Administration has, in this jobs bill, a rare opportunity to convey seriousness in its commitment to “pay-go” principles. Instead of seizing that opportunity, they are conducting a parallel PR push to convey seriousness about cutting government spending. Rather than engage in such largely symbolic exercises, OMB should be rising to the budgetary challenge now: by issuing a clear statement that the President will not sign (yet) another bill that irresponsibly adds tens of billions of dollars to the deficit.

Federal government budgeteers – on both ends of Pennsylvania Avenue – may not be serious, but our fiscal problem is rapidly becoming so. This is not the time for distraction, but for action.

e21 Partnership

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