Baseline Budgeting: “Versailles on the Potomac”

Imagine, for a moment, if you made a budget for your family and assumed that you would be getting a certain percent raise every year in perpetuity. Then imagine that you're a public sector worker.

But I repeat myself.

Anyway, no one in their right mind assumes in financial planning the sort of assumption inherent in baseline budgeting, namely that spending will increase along some arbitrary percentage forever. It's that sort of madness that makes spending freezes appear to be spending cuts.

These days, a spending freeze isn't enough to undo the current levels of deficit spending. Genuine spending cuts, reductions in absolute dollars of spending, are what is truly necessary.

And yet, most of the deficit reduction plans being discussed in Congress, from Reid and Boehner, are based upon spending freezes moreso than spending cuts. The "cuts" are all the result of spending either not growing or money not being spent many years down the line.

That's not a cut. That's like a fat person promising to go on a diet tomorrow, after they're done with the all-you-can-eat buffet they're gorging on tonight (perhaps deciding for good measure, after feasting on many plates of food, to not go back for a third desert and consider that counting toward tomorrow's diet).

The "spending cuts" contained in current proposals assume a level of fiscal probity by Congress that it has never, under either party, been able to show in eight decades. It is unlikely to manifest such virtue in terms of spending decisions now, and at the very least should not be trusted to do so.

Congress has never been able to do these things. It is unlikely to find the ability to do so in the next six days. In that sense, the entire search for a "deal" raising the debt ceiling in exchange for promises of future spending "cuts" is an exercise in folly.

Historian Arthur Herman, writing over at National Review, makes a very good point along these very lines that contains a troubling lesson from the past:

On a chilly morning in March 1788, Louis XVI’s finance minister sat down and drew up what was the first entirely truthful budget of the French monarchy — which almost turned out to be its last. It revealed that some 500 millions of revenue were offset by 629 millions in expenses, of which more than 50 percent went for service on the royal debt — a debt largely racked up, ironically enough, by Louis’s support for the American war for independence. For the first time, it was apparent that the system created to rule France since the days of Louis XIV could no longer continue. It was on that day, not the fall of the Bastille more than a year later, that the ancien régime ended.

Something similar is happening with the current debt-limit imbroglio. Some people compare our current political turn, including the growth of the Tea Party, to the American Revolution. A far better comparison is with the French Revolution. Our ancien régime is tax-and-spend Washington, which Franklin D Roosevelt, Lyndon Johnson, and a host of lesser Sun Kings built and which the current dauphin Barack Obama wants to sustain. A corrupt bloated French monarchy sustained itself on the lie of divine right of kings, which made the king’s will law. Our Versailles sustains itself on a lie called baseline budgeting.

Created in 1974 by the same Democratic congressional majority that handed over South Vietnam to the Communists and gave us the CAFE standards that ruined the American auto industry, baseline budgeting forced the Office of Management Budget for the first time to consider growing government as the fiscal norm, and reduced spending as an aberration. Even reducing the rate of spending was redefined as subtracting money, not adding money by a slightly lower amount. This has created a system which today’s Congressional Budget Office would score a freeze on all government spending as a $9 trillion cut, even though there’s no reduction in spending at all.

The root of the dilemma we face is not political or fiscal, but moral. Until Congress overturns an accounting system that deliberately distorts empirical reality, we will never escape the corruption it entails — or the catastrophe that’s coming.