The Haunting of Capitol Hill: How ‘Fixing’ Shutdowns Could Doom the Budget Forever

Quick Budget Fixes Turn Out To Be Just Tricks

While I prepare for the candy I’ll be (sneakily) pilfering from my kids’ candy baskets tonight, Washington has been haunted for a month by the government shutdown, with its effects on paychecks for federal workers, welfare programs and economic data front and center. But while the media has mostly focused on when the shutdown will end, I’ve been concerned about what will happen afterwards.

Before the shutdown began, Senator Ron Johnson wrote a Wall Street Journal op-ed, pitching his legislation to “end government shutdowns forever.” A proposal like his will likely become even more popular after a lengthy shutdown, in the same way that the howls for abolishing the debt limit grow louder each time the Treasury issues its X date.

Ending the recurring nightmare of shutdowns (and their cousin, the debt-ceiling standoff) is a noble goal. But most proposed remedies offer only procedural relief, not structural reform. The result of these proposals would be to reinforce the fundamental drivers of our fiscal decay and likely lead to worse long-term budget outcomes.

The Apparitions of Reform

Senator Johnson’s proposal would create an automatic rolling 14-day continuing resolution (CR) whenever appropriations lapse. This would keep agencies open and avoid an annual showdown at midnight. But as Paul Winfree at the Economic Policy Innovation Center has correctly stated, such a reform would only disguise dysfunction rather than resolve it:

An automatic CR would mask the dysfunction in the current system. By ensuring that spending continues on autopilot, it would reduce the already thin incentives for lawmakers to debate hard questions about fiscal priorities, debt issuance and the balance of power between Congress and the executive branch. The federal debt now exceeds $37 trillion, interest costs are skyrocketing, yet Congress has increasingly ceded authority over spending, borrowing, and even monetary policy to the other end of Pennsylvania Avenue. Automatic CRs would further normalize this abdication.

Under Johnson’s proposal, lights would stay on at every federal agency regardless of whether Congress fulfills its responsibilities to properly fund them. At that point—and especially if future congresses find ways to bake in spending increases—what would be the difference between discretionary and mandatory spending? Nothing, as all spending would become automatic. To steal a phrase from my Mercatus colleague Jack Salmon, we’d be facing “the end of policymaking.”

Other versions of automatic CRs propose automatic spending cuts. These add a flair of fiscal responsibility but face the same autopilot problem. Another well-intended proposal from Senator Johnson is multiyear appropriating. But this idea rests on the presumption that Congress’ problem is a lack of time to do its job. Perhaps—or perhaps legislators intentionally delay appropriations to leverage the shutdown threat.

If that’s the case, how would multiyear appropriating prevent Congress from waiting until the eleventh hour to fund the government? It wouldn’t. And, of course, implementing Johnson’s other proposal of automatic CRs would make multiyear appropriating a moot point.

Even proposals that would suspend congressional pay during shutdowns would likely backfire. Unless paired with structural reforms, those policies would encourage lawmakers to fund anything—no matter how reckless—just to restore their salaries. That sounds like a horror story in the making.

The Cursed Incentives Beneath the Budget

Decades before today’s fiscal frights, economists James D. Gwartney and Richard E. Wagner authored a 1988 pamphlet conveniently entitled “The Federal Budget Process: Why It Is Broken and How It Can Be Fixed.” Their insights remain eerily relevant. Here are the four budget maladies they identify:

1. “The current budget process blurs costs and thereby makes it difficult to compare benefits relative to costs on a program-by-program basis”

Wise decision-making requires a comparison of costs and benefits. However, federal spending decisions are made separately from, and often before, any decision on how to fund that spending. As a result, spending discussions emphasize the “need” for more resources on various programs such as defense, border security and healthcare but omit what it will cost to provide that additional spending.

Without having to pay for those programs up front, members of Congress are incentivized to seek additional spending to benefit their constituents. Worst yet, individual members of Congress have little incentive to oppose profligate spending by their colleagues because prevention of those individual programs would yield relatively small savings for their constituents.

2. “Under current rules, the federal budget constraint is soft”

Unlike households, businesses or most state governments, the federal government faces no binding budget limit. With no threat of insolvency or balanced-budget requirement, Washington can perpetually spend beyond its means. As result, politicians can seek voter support through new spending without levying taxes.

There’s also no bankruptcy-like feedback mechanism to ensure that resources go to their most effective uses. In the private sector, a business failure frees up resources to allow other would-be entrepreneurs to experiment with new methods of creating wealth. If a government program fails, it will often lead to more, rather than fewer, resources being spent. Stagnant poverty rates and declining literacy lead to increases in welfare and education spending, not reductions.

3. “The current budget process plays into the hands of interest groups seeking private gain at public expense”

The first two issues highlight a bias towards more government spending and deficit finance before accounting for differences in the electorate. But because individuals have different interests and evaluations, we also see the rise of interest groups.

Because government favors yield concentrated benefits and diffuse costs, well-organized special interest groups are highly motivated to exert disproportionate influence. Grants, tax credits, contracts, bailouts and protectionist trade policies serve these narrow interests while their costs are dispersed across all taxpayers.

4. “The current budget process promotes the transfer of resources from production into rent seeking”

The process just described of soliciting wealth transfers through the government is known as “rent seeking.” As it becomes easier to conjure wealth through the political process, we are likely to see more resources devoted to rent seeking behavior and fewer toward wealth creation in the market, slowing down economic growth.

The Taxpayer Protection Amendment

The driving force behind our recurring fiscal dilemmas is a perverse budget structure that encourages unbridled spending, debt accumulation and rent seeking.

To address those problems, Gwartney and Wagner propose what they refer to as the “Taxpayer Protection Amendment” (TPA). The TPA would be a constitutional amendment composed of five provisions:

1. “A two-thirds Congressional majority would be required for approval of an increase in either taxes or debt”

In addition to making it harder to summon new debt, requiring greater consensus for new debt would reduce the potential for rent seeking by limiting the power of the majority to enact spending and burden the minority with the costs.

2. “Prior to the passage of any appropriation bill and at least five months before the beginning of each fiscal year, Congress and the President would be required to set a constraint for the level of fiscal year spending”

Essentially, a budget constraint would be enacted in advance of appropriation bills, with a $5,000 daily fine for both the president and each member of Congress for each day the constraint was not passed on time. Further, a three-fourths majority would be required to pass spending beyond this limit.

At first glance, this rule resembles the current budget process. The federal government is already required to enact a budget resolution that sets top-line spending levels and contains procedural points of order to enforce those levels. But in practice, a budget resolution is rarely adopted except for when Congress and the president want to worsen deficits through reconciliation, and budgetary points of order are rarely raised. Regardless, someone may counter that top-line spending numbers are negotiated by top appropriators, who then work within those totals.

In addition to forcefully mandating on-time passage of a budget resolution, this provision would separate the vote on the aggregate spending level from the actual programmatic spending decisions. As a result, voters would have a simple metric for knowing where their elected representative stands on the size of government.

3. “Two-thirds approval of both houses would be required for passage of any legislation that mandates spending by states, private businesses, or individuals”

This provision would prevent Congress from working around its established spending limits. Even without overt transfer payments, rent seeking can be disguised in the form of mandates—such as a requirement that individuals purchase only electric vehicles or that states increase their Medicaid spending, which would then be matched by the federal government, as we currently do with the FMAP program.

4. “Any new program requiring a budget expenditure must simultaneously provide for a new source of revenue (additional taxes or user charges) which will finance the program”

Referred to as a “marginally balanced budget,” this proposal would force policymakers to connect the cost and benefits of new programs, bringing their behavior more closely in line with private actors.

5. “An item-reduction veto should be given to the President”

Two things are worth noting here. First, this provision would be an “item-reduction veto,” not a “line-item veto.” In effect, it would enshrine the practice that Office of Management and Budget Director Russ Vought has advocated for: that appropriations set a ceiling on spending, not a floor, giving the president the leeway to reduce the amount spent on programs without eliminating them entirely as would occur with a line-item veto.

Second, because this would be an amendment to the Constitution, the Supreme Court’s 1998 ruling that line-item vetoes were unconstitutional would be irrelevant.

The Real Monster in the Room

The error in proposals such as Senator Johnson’s is that we treat various fiscal phenomena—government shutdowns, the debt ceiling, new deficit spending and impending trust fund insolvencies—as isolated hauntings. In truth, these recurring fiscal problems share the same curse: a budget process that hides costs by separating spending from taxing decisions, provides only a soft budget constraint and rewards rent seekers. This reality is constantly lurking in the background of our fiscal debates.

The good news is that this congressional mystery has already been solved: The real monster isn’t the shutdown, it’s the budget process.

Now when will Congress wake up and put an end to these fiscal nightmares?