The “Missing Middle” of the Federal Budget Process: Priority-Setting

Roy T. MeyersUMBC

meyers@umbc.edu

What I don’t mean by the “missing middle”: bipartisan compromisers

• Moderate legislators who are willing to compromise across partisan lines have largely vanished

• I agree that it would be desirable to have more legislators who seek pragmatic solutions to problems

• But that is not my focus; rather, it is whether current budgeting intelligently identifies priorities and allocates resources to address these priorities

“Allocating resources” is often said to be one of three goals for budgeting

• The three major goals for budgeting (modifed from World Bank/Schick) are:– ensuring fiscal discipline at the macro level (with

additional macroeconomic management responsibility for national governments)

– encouraging program effectiveness and efficiency at the micro level

– enabling priority-setting and resource allocation at the meso (or middle) level

• This framework subsumes other presumably major goals, such as democratic responsiveness, within these three goals

Of course, there is no consensus on how to define each goal in practice

• Selected issues re fiscal discipline include: – What is the proper size of short-run deficits to stabilize the

economy?– What is the maximum sustainable debt over the long-run?– Should discretion be replaced with constitutional rules,

statutory rules, or strong centralization?• Selected issues re program efficiency and effectiveness

include: – What is the realistic promise of performance budgeting?– Can delegation and other NPM concepts survive political

challenges (e.g., earmarks)?

Selected issues re priority-setting and allocation include

• Well, actually, is anyone even talking about this topic?– Only tangentially—when traditional budget hawks fixate

on the the Big Three (SS and MM) entitlement programs as the sole cause of unsustainable long-run budgets and the Pac-Man of other priorities;

– Or the Big Two (MM), plus private health spending, for health reformers

• But the idea that budgeting should allocate resources appears to be an article of dogmatic faith, according to government budget documents

From the President’s Commission on Budget Concepts, 1967, p. 2

• “What is the budget of the United States? Fundamentally, it presents the essential ingredients of the financial plan of the Federal Government for the coming year. This plan has many aspects and must serve many purposes:– It sets forth the President’s request to Congress for

new programs, appropriation of funds, and changes in revenue legislation;

– It proposes an allocation of resources to serve national objectives, between the private and the public sectors, and within the public sector;” [emphasis supplied]

• And so on

From the President’s FY10 budget• “The budget system of the United States Government

provides the means for the President and Congress to decide how much money to spend, what to spend it on, and how to raise the money they have decided to spend. Through the budget system, they determine the allocation of resources among the agencies of the Federal Government and between the Federal Government and the private sector. [emphasis supplied] The budget system focuses primarily on dollars, but it also allocates other resources, such as Federal employment.” Analytical Perspectives, “The Budget System and Concepts,” p. 395

With apologies to Saturday Night Live, “Really?!”

• If you’ve watched the sausage made, you may be a bit skeptical that the federal budget process allocates resources with any semblance of reason

• Note that above definitions do not claim anything about the quality of allocations

• So here’s a question: How would you tell whether the budget process allocates resources well?

• Proposed answer: Confirm that budgetary practice is consistent with a normative theory of allocating resources through the budget process

• Are there any such theories?

Of course, but they aren’t very useful

• Key’s lament—how to choose between X and Y?• Standard incrementalism---e.g., Wildavsky’s

various versions– But if incrementalism suffers at the macro level for

risking unsustainable totals and the micro level for embracing an anti-managerial ethos, why not reject it at the meso level as well?

• Extreme rationalism (PPBS, etc.); the IFIs’ excessively detailed prescriptions– Been there, done that

Modern texts give scant coverage to this claimed function of budgeting

• Those with an economics slant tend towards a mix of abstract marginalism with extensive instructions on benefit-cost analysis, despite rare use in practice

• Those with a management slant emphasize variants of performance budgeting at the program level, assuming that learning about program efficiency is sufficient to allocate resources across major categories

• Few incorporate politically realistic theories (path dependency, punctuated equilibrium, structural strategy); more on this below

Suggested principles for a theory for budgetary resource allocation

1. The process must clarify whose and which resources are to be allocated

2. Budget allocations should be preceded by a process of identifying major priorities (outcomes/ impact targets) at units of aggregation above the program level

3. Categorizations of priorities and of resource allocations should be aligned

4. The effects of allocations should be incorporated through feedback loops into the following years’ processes

Reforms linked to the theory• A real Budget Concepts Commission (not a “commission” to

advocate a funder’s viewpoint)• National indicators reporting on social, economic, and

environmental conditions (selectively aggregating from available data)

• State of the nation deliberation that identifies targets (more than a prime-time, lengthy, and unrealistic speech)

• Committee (and agency) restructuring by sector (instead of so-called “regular order”)

• Periodic sector reviews and crosscuts, following a sunset schedule (not the current silo approach to performance management)

Remaining slides

• Selected examples of how the current process doesn’t work along these lines

• Summary specifics of proposed reforms• A conclusion that attempts to convince you

that I’m not that crazy

P1: Process must clarify whose and which resources are to be allocated

• Cash budgeting is obviously flawed, but incorporation of accrual has been uneven and slow due to technical and political challenges

• The scope of the budget is just as important• Many policies that allocate private resources are not included

in the budget (e.g., most regulatory and trade policies), following “cash flowing through Treasury” principle

• In recent years, scope has expanded to include some equivalents to traditional spending, especially when apparently designed to avoid budget scrutiny—e.g., Universal Service Fund

• “Principles” for on-budget status are made up on a case-by-case basis; in aggregate, do they make sense?

Current dilemmas: health reform and climate change

• “Hillarycare” featured a debate over on-budget treatment of alliances; now resolved in favor of on-budget for Exchange

• Could health reform could be killed if scored as increasing the short-run deficit even though it enables massive expansions in access and makes a plausible start to reducing public and private sector costs over the long-run?

• Herb Stein was right that we should seek to “budget the economy”—but how to do that deserve much thought and discussion

• Climate change presents even tougher issues: do you agree with CBO’s estimate of Waxman-Markey that allowances should be on-budget and offsets off-budget?

• These and related dilemmas could be addresses by a real budget commission—one that is transparent and that draws on a wide range of experts

P2: Allocations should be preceded by a process that identifies priorities

• The budget resolution debate on priorities is no longer meaningful– It was at the start—debates were closely observed– We have spent eight years at war without a meaningful “guns vs. butter”

debate (or a “guns and butter vs. future opportunities” debate)• Committee “views and estimates” now have very limited

impact• Functional allocations in the resolution do not mandate 302bs• “Mandatory” vs. “discretionary” is not a sensible basis for

priority-setting– Much “discretionary” spending is politically mandatory, and some

mandatory spending is reviewed annually• Despite claims, Senate amendments are for show, as are

“reserve funds”

How conditions could be translated to priorities and targets

• Scanning conditions that the budget could address would provide the informational foundation for priority-setting

• Especially important would be trends in conditions and benchmark levels from other countries

• The “big picture” is more comprehensible when the level of aggregation is above the program level, such as by (revised) budget functions

• While conditions are incommensurable (math: having no common factor), they are still comparable through rhetoric• E.g., is the current balance between having the world’s most

powerful military and ranking in the mid-twenties on infant mortality one that we want to maintain or change?

Three proposals to improve priority setting

• Adopt national indicators reporting on social, economic, and environmental conditions– Almost all of the necessary data is already available– Through the World Bank, we require the same of poor countries– US ranks quite poorly in many HDI and other league tables– HELP bill includes a watered-down proposal along these lines

• Devote time to a formal state of the nation debate– Spain does it; do other nations?

• Select a relatively small number of medium-term targets to which the government would commit– Was Britian foolish or wise to commit to cutting child poverty in half by a

year certain?

P3: Categorizations of priorities and resource allocations should be aligned• The current committee structure is neither well-

ordered nor orderly• Jurisdictions and related procedures are largely

the result of compromises made during the Civil War, the 1880s, and 1921

• Since then, numerous small changes have been made, sometimes to mirror executive reorganizations

• But the “regular order” is still unnecessary duplication, which plagues the legislative process

Distinctions between committee types is honored in the breach

• Authorizations and appropriations committees address the same topics in separate bills, and sometimes each year (DoD)

• Other authorizations struggle to make it to the floor, causing many expired authorizations

• Appropriators regularly provide funds for unauthorized programs and legislate in appropriations bills

• Authorizers create and protect mandatory spending

Auth. vs. apps. illogically bifurcates the two sides of performance

• Appropriators are supposed to defer to the authorizers regarding program design, instead concentrating on what is affordable this year. This reinforces the appropriators’ tradition of controlling budgetary inputs rather than taking a broader view of performance

• Authorizers, in turn, when considering discretionary programs, have a political incentive to authorize appropriations that exceed what is likely affordable

Tax expenditures; health• Tax committees have a jurisdictional license to spend

through the tax code in all areas of government activity• Tax preferences are rarely compared to regular

spending programs that address similar purposes, even in the executive branch

• No wonder the tax code is a mess– Check out the “strippable credits” in the stimulus bill– Why would Baucus spend for health using tax credits?

• And does it make sense to have split committee jurisdictions over health?– Medicare and Medicaid not integrated in the House– Program integrity rule in budget resolution

Basics of a reformed committee structure

• Budget and Taxation committee as the control committee– Significant representation from party leadership

and chairs or their representatives– Rules that require sequential referral for tax

preferences, reducing tendency to overuse tax tool

• Other committees organized by sector, with dual appropriations and authorizations functions

P4: Effects of allocations should be incorporated through feedback loops • GPRA and PART are too focused on individual programs,

and largely ignored by legislature• Obama/OMB have pledged to develop more cross-cuts, but

should go farther• Require sector reviews, as in Westminster countries

– Compare priority targets to achievements; set out strategic options across range of policy tools and within multiyear budget constraint

• IF QDR (defense), and new QDDR (diplomacy and development), have effect, why not broaden to domestic?

• Rotating reauthorization schedule would be a mechanism for sunsets and tradeoffs

The radical conclusion

• Regarding the claim that the budget process allocates resources in an intelligent way: if it is inaccurate to claim that the budget has no clothes, it is accurate to claim that its clothes are skimpy and shredded

• Politically realistic theories (path dependency, punctuated equilibrium,, structural strategy) explain why adopting the proposed normative model is difficult, but not impossible

E.g., barriers to committee restructuring

• CQ Weekly reports that the average tenure of a Member of Congress is the longest in history

• Informally-vested seniority rights are strong, especially for the many legislators who aspire to become committee chairs

• Many affected interests benefit from the status quo

• Inside-the Beltway budget experts, suffused with political realism, refuse to consider the issue

How budgeting academics can help• Many Inside-the-Beltway budget experts are also so

cynical about the process that they recommend adopting extraordinary institutions to “force” or “trigger” the policy actions they desire

• This position is at least as unrealistic as my proposed reforms

• Plus it retreats from the obligation to propose lasting improvements to core institutions

• Academics should not join this backward march; we should develop robust normative models of how budgets should allocate resources