James Pethokoukis

Congress should be looking hard at dramatic discretionary spending cuts.  It’s really gotten out of control (via the Congressional Budget Office):

Such outlays equaled about 10 percent of gross domestic product (GDP) during much of the 1970s and 1980s, then gradually fell to 6.2 percent of GDP in 1999 . Thereafter, discretionary outlays began increasing relative to GDP— reaching 7.0 percent in 2002 and 7.9 percent by 2008— partly because of actions taken in response to the terrorist attacks of September 11, 2011, and subsequent military operations in Afghanistan and Iraq. In the past few years, discretionary spending has been boosted by funding provided in the American Recovery and Reinvestment Act of 2009 and by policy responses to the recent turmoil in financial markets. Discretionary outlays rose to 8.8 percent of GDP in 2009 and to 9.3 percent last year—the highest share of GDP since 1988.

And here is what is in discretionary spending:

My pal Charlie Gasparino questions whether the GOP is making a huge mistake by focusing so intently on cutting deficits and spending:

The GOP — where Jack Kemp and Ronald Reagan once saw a limitless future based on a free-market plan for growth — has become the party of green eyeshades, government shutdowns and dour predictions about our future, while the American people continue to suffer. …  In recent weeks, the left-leaning and bailed-out Wall Street firm Goldman Sachs offered what the mainstream media considered a credible take on how GOP efforts to block the president’s spending initiatives will slow our feeble economic recovery and modest reductions in unemployment. … Wisconsin Gov. Scott Walker and New Jersey Gov. Chris Christie have become GOP icons for their courage in taking on public-sector unions — but the broader appeal of their message of cutting budgets before cutting taxes is still questionable.

On the face of it, at least, Charlie may have the politics right. Here are two recent polls (via PollingReport.com) that look at national priorities. Both put jobs ahead of deficits.

Of course, what Republicans are trying to do is make the case that cutting spending is good for growth because a) it will prevent a debt crisis like Ireland and Greece have experienced, and b) it will shift resources from  low-productivity government to the higher-productivity private sector. And I think there is some evidence that the argument is starting to take hold, such as this recent Bloomberg poll:

That being said, I would like to see a clear and comprehensive plan to reform taxes and reduce regulation. Still waiting, though.

National Journal’s Hotline is out with its insiders’ take on the state of the Republican race for the White House:

The infamous Bernstein-Romer chart, now updated for political freshness:

“Where there is discord, may we bring harmony. Where there is error, may we bring truth. Where there is doubt, may we bring faith. And where there is despair, may we bring hope.” — Margaret Thatcher, May 4, 1979.

Reducing the power of government unions has several major benefits: 1) It will begin to make it easier to rework pension and healthcare obligations; 2) it will begin to make it easier to restructure government so that it is more efficient and less expensive; 3) it will begin to end a system where a major political party often acts as a wholly owned subsidiary of a special interest; and 4) it will begin help save the U.S. education system where teachers unions are preventing children from being taught by competent teachers.

The very good news from Wisconsin:

Republicans in the Wisconsin state Senate passed the most controversial portions of Governor Scott Walker’s budget repair bill late on Wednesday, stripping out the sections that required the presence of their 14 absent Democratic colleagues in the upper chamber.

In an 18-to-1 vote, the Senate approved the curbs on collective bargaining by public employees that Walker has insisted are needed to help the state’s cash-strapped municipalities deal with a projected $1.27 billion drop in state aid over the next two years. The measure will now go to the Assembly, expected to vote on the matter on Thursday.

That’s the question CNBC’s Larry Kudlow asked House Budget Chairman Paul Ryan yesterday, which resulted in a fascinating exchange:

KUDLOW:  But what do you say to supply siders and others who argue–regarding Social Security, not health care–if you grow the economy in the next 50 years at 3 1/2 percent per year, which is the long-term growth since World War II, then Social Security will fix itself?

Rep. RYAN: No, it doesn’t.

KUDLOW: Now that doesn’t mean we shouldn’t have a personal account option and so forth, but that’s what they argue. If you grow the economy, growth, growth, growth, then we don’t have to slash benefits and the Republican Party will look better, not worse.

Rep. RYAN: Except, first of all, nobody is talking about slashing benefits. We’re not even talking about touching benefits for people in and near retirement. But we’ve run those numbers on growth and Social Security and they don’t catch up, because when you have more growth and you have more Social Security contributions, you have more expenses. The more you pay in, the more you get out. So growth, you cannot grow yourself out of our Social Security solvency problem. I’ve run those numbers with the actuaries. You do need to make some changes in Social Security benefit for the future generations to make this program solvent.

KUDLOW: But the actuaries say you can only grow at 2 percent for the next 50 years.

Rep. RYAN: No. But even if you run bigger growth numbers through the system, you still don’t fix the problem. I’ve run those numbers. I’ve run the 3 and 3 1/2 percent growth numbers through the system. We are kidding ourselves if we think we can simply grow ourselves out of our entitlement problems. We can’t. We have an $88.6 trillion unfunded liability with our entitlement programs, according to the GAO. Last year that was a $76.4 trillion problem. Every year we delay fixing these entitlement programs. We go about $10 trillion deeper into our unfunded liabilities.

Me:  This is actually a tricky issue.  As the CBO forecasts it, America’s debt-to-GDP ratio could top 700 percent by 2080. But drill down into that prediction and you find that the CBO has plugged in a rather dismal long-term forecast of U.S. economic growth, just 2 percent or so. That’s only two-thirds of the average U.S. growth rate since 1970. But what if (a) government spending tracks current projections over the next 70 years, (b) government revenue as a percentage of GDP stays at its historic average of 18 percent, and (c) the economy were somehow to grow a bit faster than its 20th-century average, about 3.5 percent.

Under those conditions, according to a recent study by JPMorgan Chase, a much wealthier America (generating $100 trillion in tax revenue rather than $50 trillion) would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.

So Kudlow is correct — if you could find a way to meet those conditions.

But here is the problem with that math:

1) It, as Ryan alludes to, ignores that Social Security benefits are linked to income growth.  So higher growth equals higher benefits, though a quirk in how benefits are figured means faster growth could reduce the program’s short-fall by 25 percent or so.

2) Healthcare costs continue to increase at a rate faster than GDP growth. So you have to find a way to bring down spending, or healthcare will consume an ever bigger part of the pie and continually boost government spending (unless you reduce Uncle Sam’s role). This chart from the CBO tells is all:

Another scary chart from Mary Meeker’s USA Inc. report:

The U.S. lawmaking process is completely rigged toward favoring increases in federal spending rather than cuts. Sen. John Thune recently introduced a bill that would go a long way in tilting the playing field back the other direction.

Another good idea comes Orrin Hatch, the Utah Republican, and Mark Udall, a Colorado Democrat. They want to create a bipartisan Committee to Reduce Government Waste. A better name would be the Anti-Appropriations Committee. Its raison d’être would be finding and eliminating inefficient and duplicative government programs, like those the government’s chief auditor recently identified. A few thoughts:

1. It’s an old idea, but a good one. The committee’s model is the Joint Committee on Reduction of Non-essential Federal Expenditures, started in 1941 by Sen. Harry Byrd who objected to paying for America’s war effort by raising taxes. In its first three years, the panel claimed credit for some $2 billion in savings, equivalent to perhaps $25 billion today.

2. Under the Hatch-Udall bill, the committee could fast-track its annual recommendations to the Senate floor. Perhaps an even clearer mandate would be to give the panel a specific goal, such as finding cuts equal to some percentage of the previous year’s deficit, as Thune suggests in his bill.

3. But establishing an anti-appropriations committee would be just a first step. Another could be setting budgets for two years rather than one, giving Congress more time to craft and monitor fiscal plans. Lawmakers, after all, have only met the current annual budgeting deadline in four of the past 34 years. Other potential reforms would make it harder to skirt restrictions by labeling outlays as emergency spending.

Bottom line: Of course, none of this avoids the broader need to whittle down America’s long-term healthcare and retirement obligations. But new structures that emphasize discipline could put Congress a bit more in the mood to save rather than spend.

From James Glassman of JPMorgan (the purple and red are your worrisome colors):

IBD’s Jed Graham shows what’s supporting consumer spending these days:

Three props to personal income — higher social insurance benefits, lower tax payments and higher government wages and benefits — are adding just shy of $1 trillion to personal income on an annualized basis relative to pre-recession levels.

Those government supports account for the entire $932 billion, or 8.7%, increase in personal disposable income — and then some — since the start of the recession. In other words, government income props, mostly deficit-financed, have paid for all the gains in personal spending and saving.